Mean Reversion in Stock Prices? a Reappraisal of the Empirical Evidence

39 Pages Posted: 16 Jun 2004 Last revised: 22 Aug 2022

See all articles by Myung Jig Kim

Myung Jig Kim

Hanyang University; National Bureau of Economic Research (NBER)

Charles R. Nelson

Dept of Economics

Richard Startz


Date Written: December 1988


Recent research based on variance ratios and multiperiod-return autocorrelations concludes that the stock market exhibits mean reversion in the sense that a return in excess of the average tends to be followed by partially offsetting returns in the opposite direction. Dividing history into pre-1926, 1926-46, and post-1946 subperiods, we find that the mean-reversion phenomenon is a feature of the 1926-46 period, but not of the post-1946 period which instead exhibits persistence of returns. Evidence for pre-1926 data is mixed. The statistical significance of test statistics is assessed by estimating their distribution using stratified randomization. Autocorrelations of multiperiod returns imply a forecast of future returns, which is presented for post-war three-year returns using 1926-46, full sample, and sequentially updated coefficient estimates. The correlation between actual and forecasted returns is negative in each case. We conclude that evidence of mean reversion in U.S. stock returns is substantially weaker than reported in the recent literature. If mean-reversion continues to be a feature of the stock market, then the experience of the past forty years has been an aberration.

Suggested Citation

Kim, Myung Jig and Nelson, Charles R. and Startz, Richard, Mean Reversion in Stock Prices? a Reappraisal of the Empirical Evidence (December 1988). NBER Working Paper No. w2795, Available at SSRN:

Myung Jig Kim (Contact Author)

Hanyang University

Korea, Republic of (South Korea)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charles R. Nelson

Dept of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

Richard Startz

UCSB ( email )

Department of Economics
University of California
Santa Barbara, CA 93106-9210
United States
805-893-2895 (Phone)