Average Crossing Time: An Alternative Characterization of Mean Aversion and Reversion

72 Pages Posted: 4 Feb 2019

See all articles by John B. Donaldson

John B. Donaldson

Columbia University - Columbia Business School

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2019

Abstract

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.

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Suggested Citation

Donaldson, John B. and Mehra, Rajnish, Average Crossing Time: An Alternative Characterization of Mean Aversion and Reversion (January 2019). NBER Working Paper No. w25519. Available at SSRN: https://ssrn.com/abstract=3328386

John B. Donaldson (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics ( email )

Tempe, AZ 85287-3806
United States
480 965 6335 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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