Mean reversion in stock prices: Implications for long-term investors

Laura Spierdijk*, Jacob A. Bikker

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingChapterAcademicpeer-review

Abstract

This chapter discusses the implications of mean reversion in stock prices for long-term investors such as pension funds. We start with a general definition of a mean-reverting price process and explain how mean reversion in stock prices is related to mean reversion in stock returns. Subsequently, we show that mean reversion makes stocks less risky for investors with long investment horizons. Next, we consider a mean-variance efficient investor and show how mean reversion in stock prices affects such an investor’s optimal portfolio weights. Finally, we discuss the implications of our findings for the investment decisions of long-term investors.
Original languageEnglish
Title of host publicationPension Fund Economics and Finance
Subtitle of host publicationEfficiency, Investments and Risk-Taking
PublisherTaylor & Francis
Pages119-139
Number of pages21
ISBN (Electronic)9781315621739
ISBN (Print)9781138656802
DOIs
Publication statusPublished - 22 Nov 2017
Externally publishedYes

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