Topic
Mean reversion
About: Mean reversion is a research topic. Over the lifetime, 2735 publications have been published within this topic receiving 86254 citations.
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TL;DR: In this paper, the authors developed and analytically tractable empirical model of investment and the current account, and applied it to data from the G-7 countries and found that the difference between global and country-specific shocks turns out to be quite important for explaining current account behavior.
504 citations
TL;DR: The PPP puzzle is based on empirical evidence that international price differences for individual goods (LOOP) or baskets of goods (PPP) appear highly persistent or even nonstationary as discussed by the authors.
Abstract: The PPP puzzle is based on empirical evidence that international price differences for individual goods (LOOP) or baskets of goods (PPP) appear highly persistent or even nonstationary. The present consensus is these price differences have a half-life that is of the order of five years at best, and infinity at worst. This seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons, typically days or weeks. However, current empirics rely on a particular choice of methodology, involving (i) relatively low-frequency monthly, quarterly, or annual data, and (ii) a linear model specification. In fact, these methodological choices are not innocent, and they can be shown to bias analysis towards findings of slow convergence and a random walk. Intuitively, if we suspect that the actual adjustment horizon is of the order of days, then monthly and annual data cannot be expected to reveal it. If we suspect arbitrage costs are high enough to produce a substantial “band of inaction,” then a linear model will fail to support convergence if the process spends considerable time random-walking in that band. Thus, when testing for PPP or LOOP, model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets.
485 citations
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TL;DR: This paper found that the mean reversion phenomenon is a feature of the 1926-46 period, but not of the post-1946 period which instead exhibits persistence of returns Evidence for pre-1926 data is mixed and the statistical significance of test statistics is assessed by estimating their distribution using stratified randomization.
Abstract: Recent research based on variance ratios and multiperiod-return autocorrelations concludes that the stock market exhibits mean reversion in the sense that a return in excess of the average tends to be followed by partially offsetting returns in the opposite direction Dividing history into pre-1926, 1926-46, and post-1946 subperiods, we find that the mean-reversion phenomenon is a feature of the 1926-46 period, but not of the post-1946 period which instead exhibits persistence of returns Evidence for pre-1926 data is mixed The statistical significance of test statistics is assessed by estimating their distribution using stratified randomization Autocorrelations of multiperiod returns imply a forecast of future returns, which is presented for post-war three-year returns using 1926-46, full sample, and sequentially updated coefficient estimates The correlation between actual and forecasted returns is negative in each case We conclude that evidence of mean reversion in US stock returns is substantially weaker than reported in the recent literature If mean-reversion continues to be a feature of the stock market, then the experience of the past forty years has been an aberration
455 citations
TL;DR: In this article, the authors developed a dynamic model of market-making incorporating inventory and information effects, where the marketmaker is both a dealer and an investor, quoting prices that induce mean reversion in inventory toward targets determined by portfolio considerations.
Abstract: The authors develop a dynamic model of market-making incorporating inventory and information effects. The marketmaker is both a dealer and an investor, quoting prices that induce mean reversion in inventory toward targets determined by portfolio considerations. The authors test the model with inventory data from a New York Stock Exchange specialist. Specialist inventories exhibit slow mean reversion, with a half-life of over forty-nine days, suggesting weak inventory effects. However, after controlling for shifts in desired inventories, the half-life falls to seven and three-tenths days. Further, quote revisions are negatively related to specialist trades and are positively related to the information conveyed by order imbalances. Copyright 1993 by American Finance Association.
452 citations
TL;DR: The authors characterize a three-factor model of commodity spot prices, convenience yields, and interest rates, which nests many existing specifications, allowing convenience yields to depend on spot prices and interest rate also allows for time-varying risk premia.
Abstract: We characterize a three-factor model of commodity spot prices, convenience yields, and interest rates, which nests many existing specifications. The model allows convenience yields to depend on spot prices and interest rates. It also allows for time-varying risk premia. Both may induce mean reversion in spot prices, albeit with very different economic implications. Empirical results show strong evidence for spot-price level dependence in convenience yields for crude oil and copper, which implies mean reversion in prices under the risk-neutral measure. Silver, gold, and copper exhibit time variation in risk premia that implies mean reversion of prices under the physical measure.
441 citations