An Equilibrium Theory of Excess Volatility and Mean Reversion in Stock Market Prices

20 Pages Posted: 27 Apr 2000 Last revised: 29 Jun 2010

See all articles by Alan J. Marcus

Alan J. Marcus

Boston College - Department of Finance

Date Written: September 1989

Abstract

Apparent mean reversion and excess volatility in stock market prices can be reconciled with the Efficient Market Hypothesis by specifying investor preferences that give rise to the demand for portfolio insurance. Therefore, several supposed macro anomalies can be shown to be consistent with a rational market in a simple and parsimonious model of the economy. Unlike other models that have derived equilibrium mean reversion in prices, the model in this paper does not require that the production side of the economy exhibit mean reversion. It also predicts that mean reversion and excess volatility will differ substantially across subperiods.

Suggested Citation

Marcus, Alan J., An Equilibrium Theory of Excess Volatility and Mean Reversion in Stock Market Prices (September 1989). NBER Working Paper No. w3106. Available at SSRN: https://ssrn.com/abstract=227294

Alan J. Marcus (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-2767 (Phone)
617-552-0431 (Fax)

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