What Can We Learn from 123 Years of Stock Market Fluctuations? Processes of Mean Aversion and Reversion

Abstract

This article uses the accumulative mean as the population mean to reexamine the mean reversion phenomenon in 123 years of stock returns. The analysis provides strong empirical evidence for mean aversion and mean reversion in stock returns. Mean aversion reflects how investors’ overreaction to news leads to extraordinary returns, while mean reversion depicts stock price correcting processes, from irrational level to historical accumulative mean.

TOPICS: Volatility measures, security analysis and valuation, performance measurement