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

Laura Spierdijk, Jacob A. Bikker

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
EditorsJacob A. Bikker
Place of PublicationAbingdon, Oxon ; New York, NY
PublisherRoutledge
Chapter6
Pages119-139
Number of pages21
ISBN (Electronic)9781315621739
ISBN (Print)9781138656802
DOIs
Publication statusPublished - 2018

Publication series

NameRoutledge International Studies in Money and Banking

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