Nonlinear Mean Reversion in Stock Prices

S. Manzan

No 264, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: We investigate evidence for nonlinear mean reversion in yearly S\&P500 data from 1871 until 2001. We find that up to 1990 there is significant evidence of nonlinear mean reversion. In particular, stock prices are characterized by a persistent process close to the fundamental value. However, when prices deviate significantly a mean reverting regime is activated and prices adjust to fundamental values. Instead, the stock price run-up of the late 90s exacerbated the persistence of the deviations and there is no evidence for a mean reverting regime that drives prices back to fundamentals.

Keywords: nonlinear time series; mean reversion (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ets and nep-fin
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Citations: View citations in EconPapers (3)

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