Interpreting mean reversion in stock returns

Gangopadhyay, Partha; Reinganum, Marc R.

doi:10.1016/s1062-9769(96)90022-8

Cited by 16 publications

(8 citation statements)

References 14 publications

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“…Similar conclusions emerge from Gangopadhyay & Reinganum (1996). However, they argue that mean reversion can be explained by the CAPM if the market risk premium is allowed to vary over time.…”

Section: Relative Mean Reversionsupporting

confidence: 52%

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

Spierdijk¹,

Bikker²

2012

JOIS

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This paper discusses the implications of mean reversion in stock prices for longterm investors such as pension funds. We start with a general definition of a meanreverting 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.

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Section: Relative Mean Reversionsupporting

confidence: 52%

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

Spierdijk¹,

Bikker²

2012

JOIS

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“…In summary, contrary to much of the recent literature on the topic (Jegadeesh, 1991;Kim et al, 1991;Gangopadhyay, 1996;Gangopadhyay and Reinganum, 1996), the The table below reports the SUR estimation results for stock prices relative to a benchmark as shown in Eq.…”

Section: Use the Equationmentioning

confidence: 89%

“…Second, the use of proxies to represent a stock's fundamental or trend value causes estimates of the speed of reversion to be inconsistent and possess a downward bias. Third, although a great deal of effort has been devoted to analyzing mean reversion using size-sorted portfolios (for example, Fama and French, 1988;Jegadeesh, 1991;Gangopadhyay, 1996;Gangopadhyay and Reinganum, 1996), the amount of research devoted to analyzing mean reversion using industry-sorted portfolios has been limited. Only Fama and French (1988) use industry groups to test for the existence of mean reversion.…”

Section: Introductionmentioning

confidence: 99%

Mean reversion of industry stock returns in the U.S., 1926–1998

Gropp¹

2004

Journal of Empirical Finance

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“…Zarowin (1990) found that the contrarian profits are mainly generated in this month. Jegadeesh (1991) and Gangopadhyay and Reinganum (1996) also found that the mean reversion is a January effect in the US and in the UK markets. On the London Stock Exchange, Galariotis et al (2007) found that the January effect does not explain the profitability of the contrarian strategies.…”

Section: The Rational Approachmentioning

confidence: 91%

An Empirical Essay to Explain the Contrarian Profits in the Tunisian Stock Market: Behavioral Approach vs. Rational Approach

Boussaidi¹

2015

IJEF

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This paper aims to investigate the behavioral and the rational explanations for the contrarian profits in the Tunisian stock market. We use the CAPM and the three-factor model of French (1993, 1996) to examine the rational explanations including the market risk, the size effect and the book to market effect. Behavioral explanations include the overconfidence bias and the investor sentiment. We use the decomposition of the trading volume advanced by Chuang and Lee (2006) to extract the factor reflecting the investor overconfidence and the ARMS index to measure the investor sentiment. These two variables are included in the three-factor model of French (1993, 1996) in an attempt to confront the rational approach with the behavioral approach. The results indicate that the contrarian profits on the Tunisian stock market are explained by the market risk, the size effect and the Book to Market effect; and that once adjusted for these three risk factors, they disappear. However, only the factor reflecting overconfidence among the two behavioral factors seems to play a role in explaining these abnormal returns.

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Interpreting mean reversion in stock returns

Cited by 16 publications

References 14 publications

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

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

Mean reversion of industry stock returns in the U.S., 1926–1998

An Empirical Essay to Explain the Contrarian Profits in the Tunisian Stock Market: Behavioral Approach vs. Rational Approach

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