Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies

Authors

  • Ronald Balvers,

  • Yangru Wu,

  • Erik Gilliland

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    • West Virginia University, Rutgers University, and West Virginia University, respectively. We thank Jonathan Lewellen, Bill McDonald, Dilip Patro, John Wald, and conference participants of the Eastern Finance Association, Western Finance Association, and the Ninth Annual Conference on Financial Economics and Accounting at the Stern School of Business of New York University for helpful conversations and comments. We are especially grateful to René Stulz (the editor) and two anonymous referees whose comments and suggestions led to a substantial improvement in the quality of the paper. The usual disclaimer applies. We would also like to thank Morgan Stanley Capital International for providing part of the data used in this project. Balvers acknowledges the Faculty Research Associates program of the Bureau of Business and Economic Research at West Virginia University for research support.


Abstract

For U.S. stock prices, evidence of mean reversion over long horizons is mixed, possibly due to lack of a reliable long time series. Using additional cross-sectional power gained from national stock index data of 18 countries during the period 1969 to 1996, we find strong evidence of mean reversion in relative stock index prices. Our findings imply a significantly positive speed of reversion with a half-life of three to three and one-half years. This result is robust to alternative specifications and data. Parametric contrarian investment strategies that fully exploit mean reversion across national indexes outperform buy-and-hold and standard contrarian strategies.

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