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Temporary Movements In Stock Prices

32 Pages Posted: 13 Apr 2002  

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2001

Abstract

Mean reversion in stock prices is stronger than commonly believed. I show that 1-, 3-, and 5-year returns are negatively related to future returns over the subsequent 12 to 18 months. Reversals in 1- year returns are the most reliable, with strong significance in both the full 1926 - 1998 sample and the more recent 1946 - 1998 period. The reversals are also economically significant. The full-sample evidence suggests that 25% to 45% of annual returns are temporary, reversing within 18 months. The percentage drops to between 20% and 30% after 1945. Mean reversion appears strongest in larger stocks and can take several months to show up in prices.

Suggested Citation

Lewellen, Jonathan, Temporary Movements In Stock Prices (March 2001). Texas Finance Festival. Available at SSRN: https://ssrn.com/abstract=307339 or http://dx.doi.org/10.2139/ssrn.307339

Jonathan W. Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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