Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence.

This paper reexamines the empirical evidence for mean-reverting behavior in stock prices. Comparison of data before and after World War II shows that mean reversion is entirely a prewar phenomenon. Using randomization methods to calculate significance levels, the authors find that the full sample evidence for mean reversion is weaker than previously indicated by Monte Carlo methods under a normal assumption. Further, the switch to mean-averting behavior after the war is about to be too strong to be compatible with sampling variation. The authors interpret these findings as evidence of a fundamental change in the stock returns process. Copyright 1991 by The Review of Economic Studies Limited.