Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies

By Ronald J. Balvers, Yangru Wu, Erik Gilliland. 2000

371 citations recorded by the source corpus.

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. Copyright The American Finance Association 2000.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/117557c2e70dc1947888b65fff477b5214c92247

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Citations in the corpus

Institutional Portfolio Flows and International Investments (2008, background): “For evidence that international equity returns are mean-reverting, see Balvers, Wu, and Gilliland (2000) .”
Momentum and mean reversion across national equity markets (2006, methodology): “Methodologically we follow Balvers et al. (2000) (hereafter BWG) who employ a parametric approach, but focus on mean reversion only.5 5 The BWG empirical formulation appears to allow for momentum effects as well as mean reversion, by using an augmented instead of a regular Dickey–Fuller formulation.”
Random walk versus breaking trend in stock prices: Evidence from emerging markets (2003, methodology): “Balvers et al. (2000) report significant evidence of mean reversion in annual equity indexes for a sample of eighteen developed countries and demonstrate that one can exploit the property of mean reversion to predict annual equity returns using a parametric contrarian investment strategy.”
Optimal Mean Reversion Trading with Transaction Costs and Stop-Loss Exit (2014, neutral): “…including commodities (see Schwartz (1997)), foreign exchange rates (see Engel and Hamilton (1989); Anthony and MacDonald (1998); Larsen and Sørensen (2007)), as well as US and global equities (see Poterba and Summers (1988); Malliaropulos and Priestley (1999); Balvers et al. (2000); Gropp (2004)).”
Stock market volatility, excess returns, and the role of investor sentiment (2002, methodology): “We modify our model in Eq. (1) to include lagged excess return terms to assist in removing the serial correlations (Dickey and Fuller, 1979; Balvers et al., 2000 ) in, and possibly reducing the non-normality of, the standardized residuals.”