Mean Reversion in Stock Prices: Tests Using Duration Models

Abstract

This study uses parametric hazard models to investigate duration dependence in US stock market cycles over the January 1929 through December 1992 period. Market cycles are determined using the Beveridge‐Nelson (1981) approach to the decomposition of economic time series. The results show that both real and nominal cycles exhibit positive duration dependence. The implication of this finding is that actual prices revert to their permanent or trend level in a non‐random manner as the cyclical component dissipates over time. This process is consistent with mean reversion in price and suggests that predictable periodicity in market cycles may exist. Only limited evidence is obtained that discrete shifts or trends in mean cycle duration exist. The length of market cycles appears not to have changed over the 1929–92 period.

Citation

Cochran, S.J. and DeFina, R.H. (1995), "Mean Reversion in Stock Prices: Tests Using Duration Models", Managerial Finance, Vol. 21 No. 7, pp. 3-24. https://doi.org/10.1108/eb018525