Mean reversion in international stock markets: An empirical analysis of the 20th century

Laura Spierdijk*, Jacob A. Bikker, Pieter van den Hoek

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

31 Citations (Scopus)

Abstract

This paper analyzes mean reversion in the stock markets of 18 OECD countries during the years 1900-2009. In this period it takes stock prices about 18.5 years, on average, to absorb half of a shock. However, using a rolling-window approach we establish large fluctuations in the speed of mean reversion over time. The highest mean reversion speed is found for the period including the Great Depression and the start of World War II. Furthermore, the early years of the Cold War and the period containing the Oil Crisis of 1973, the Energy Crisis of 1979 and Black Monday in 1987 are also characterized by relatively fast mean reversion. We document half-lives ranging between 2.0 and 22.6 years. Our results suggest that the speed at which stocks revert to their fundamental value is higher in periods of high economic uncertainty, caused by major economic and political events.

Original languageEnglish
Pages (from-to)228-249
Number of pages22
JournalJournal of international money and finance
Volume31
Issue number2
DOIs
Publication statusPublished - 2012
Externally publishedYes

Keywords

  • Market efficiency
  • Mean reversion
  • Panel unit root test
  • Stock prices

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