Average Crossing Time: An Alternative Characterization of Mean Aversion and Reversion
71 Pages Posted: 8 Feb 2019
Date Written: January 26, 2019
We evaluate the properties of mean reversion and mean aversion in asset prices and returns as commonly characterized in the finance literature. The study is undertaken within a class of well-known dynamic stochastic general equilibrium models and shows that the mean reversion/aversion distinction is largely artificial. We then propose an alternative measure, the ‘Average Crossing Time’ that both unifies these concepts and provides an alternative characterization. Ceteris paribus, mean reverting processes have a relatively shorter average crossing time as compared to mean averting processes.
Keywords: Mean Reversion, Mean Aversion, Average Crossing Time
JEL Classification: C13, C53, E3, E44 G1, G12, E47
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