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Title: Mean-Reverting State Variables as a Factor in Mean-Reverting Stock Returns

Authors: Vincent P. Apilado; Gary M. Richardson

Addresses: Author address listing can be found in the "About the Authors" section at the end of the article.

Abstract: This paper tests for mean reversion in macroeconomic and fundamental variables. We also contrast results derived from alternative methodologies. Tests of mean reversion using OLS regression, variance ratios, and Markov chain techniques are performed on S&P 500 returns, small stock returns, default premia, dividend yields, industrial production, inflation, and term premia. Findings indicate that mean reversion is not unique to stock returns. We also find that mean reversion results are highly sensitive to the methodology applied. Our findings suggest that mean reversion in stock returns may result from rational responses of investors to changing business conditions.

Keywords: Mean reversion; stock returns; macroeconomic variables; fundamental variables; business conditions.

DOI: 10.1504/JBM.1996.141021

Journal of Business and Management, 1996 Vol.3 No.3, pp.9 - 26

Published online: 05 Sep 2024 *