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Long Term Mean Reversion of Stock Prices Based on Fractional Integration  

Jun, Duk-Bin (KAIST Business School)
Kim, Yong-Jin (Tepper School of Business, Carnegie Mellon University)
Park, Dae-Keun (Accenture Management Consulting)
Publication Information
Management Science and Financial Engineering / v.17, no.2, 2011 , pp. 85-97 More about this Journal
Abstract
In this study we examine the long term behavior of stock returns. The analysis reveals that negative autocorrelations of the returns exist for a super-long horizon as long as 10 years. This pattern, however, contrasts to predictions of previous stock price models which include random walks. We suggest the introduction of a fractionally integrated process into a nonstationary component of stock prices, and demonstrate empirically the existence of the process in NYSE stock returns. The predicted values of autocorrelation from our stock price model confirm the super-long term behavior of the returns observed in regression, indicating that inefficiency in the stock market could remain for a long time.
Keywords
Fractional Integration; Market Inefficiency; Mean Reversion; Stock Price Model;
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