Black Was Right: Price Is Within a Factor 2 of Value
9 Pages Posted: 16 Nov 2017 Last revised: 19 Nov 2017
Date Written: November 17, 2017
We provide further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). Our results bolster Black’s intuition that prices tend to be off roughly by a factor of 2, and take years to equilibrate. The story behind these results fits well with the existence of two types of behaviour in financial markets: “chartists”, who act as trend followers, and “fundamentalists”, who set in when the price is clearly out of line. Mean-reversion is a self-correcting mechanism, tempering (albeit only weakly) the exuberance of financial markets.
Keywords: Trend Following, Mean-Reversion, Market Anomalies, Behavioral Biases
JEL Classification: G2, G11, G12, G14
Suggested Citation: Suggested Citation