Abstract

http://ssrn.com/abstract=2209048
 
 

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Secular Mean Reversion and Long-Run Predictability of the Stock Market


Valeriy Zakamulin


University of Agder - Faculty of Economics

April 3, 2013


Abstract:     
Using 141 years of data, this paper begins by performing formal tests of the random walk hypothesis in the prices of S\&P Composite Index over increasing horizons up to 40 years. Even though our results cannot support the conventional wisdom which says that the stock market is safer for long-term investors, our findings speak in favor of the mean reversion hypothesis. In particular, we find statistically significant in-sample evidence that past 15-17 year returns are able to predict future 15-17 year returns. The paper continues by investigating the out-of-sample performance of long-horizon return forecast based on the mean-reverting model. These latter tests demonstrate that the forecast based on the mean-reverting model is statistically significantly better than the forecast based on the historical-mean model. Moreover, the out-of-sample forecast based on the mean-reverting model is comparable to that based on the Robert Shiller's model that uses the cyclically adjusted price-to-earnings ratio as a predictor for long-horizon returns.

Number of Pages in PDF File: 36

Keywords: predictability, stock returns, long-run, random walk, mean reversion, bootstrap simulation

JEL Classification: C12, C14, C22, G12, G14, G17

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Date posted: January 31, 2013 ; Last revised: April 10, 2013

Suggested Citation

Zakamulin, Valeriy, Secular Mean Reversion and Long-Run Predictability of the Stock Market (April 3, 2013). Available at SSRN: http://ssrn.com/abstract=2209048 or http://dx.doi.org/10.2139/ssrn.2209048

Contact Information

Valeriy Zakamulin (Contact Author)
University of Agder - Faculty of Economics ( email )
School of Management
Service Box 422
Kristiansand, N-4604
Norway
+47 38141039 (Phone)
Feedback to SSRN


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