Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Authors

  • HENDRIK BESSEMBINDER,

  • JAY F. COUGHENOUR,

  • PAUL J. SEGUIN,

  • MARGARET MONROE SMOLLER

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    • Bessembinder is from Arizona State University, Coughenour is from the University of Massachusetts—Boston, Seguin is from the University of Michigan, and Smoller is from Wayne State University. The authors thank Kaushik Amin, Warren Bailey, Kalok Chan, Mike Hertzel, Grant McQueen, René Stulz (the editor), two anonymous referees, and seminar participants at Duke University, Arizona State University, Wayne State University, the Hong Kong University of Science and Technology, the Australian Graduate School of Management, and the Commodity Futures Trading Commission for valuable comments. Bessembinder acknowledges financial support from the summer research program at the College of Business of Arizona State University.

ABSTRACT

We use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices. The empirical results indicate mean reversion in each market we examine. For agricultural commodities and crude oil the magnitude of the estimated mean reversion is large; for example, point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months. For metals, the degree of mean reversion is substantially less, but still statistically significant. We detect only weak evidence of mean reversion in financial asset prices.

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