Estimating the Mean-reverting Component in Stock Prices: A Cross-country comparison |
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| Authors: | Liam A Gallagher Lucio Sarno & Mark P Taylor |
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| Institution: | University College Cork,;Brunel University,;University of Oxford and Centre for Economic Policy Research |
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| Abstract: | This paper investigates the mean-reverting component in real stock prices for sixteen countries using a Kalman filter maximum likelihood estimation procedure to measure the transitory, permanent and seasonal components. Evidence is provided supporting the mean-reversion hypothesis that stock prices are not pure random walks: a statistically significant mean reverting component is found in each country's stock prices. Nevertheless, for twelve of the sixteen countries the transitory component does not explain more than 5% of the variation in stock prices. |
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