Authors: Seifu Zerihun; Fassil Fanta
Addresses: Information Analytics, Caterpillar Inc., 1505 North Peoria Ave Suite 404, Peoria, IL, USA ' Social Science Department, University of Wisconsin Stout, 334G Harvey Hall, Menomonie, WI, USA
Abstract: Our study revisits the seminal work of Fama and French (1988) on mean-reverting behaviour of stock prices. Since then, there are limited studies conducted to attest the results and the methodology implemented by the authors. We use an updated monthly data for the period ranging 1926-2008. As in Fama and French (1988), our findings support the U-shaped patterns of first-order autocorrelations of industries portfolio returns, which implies that stock prices have both random-walk and slowly decaying stationary components. However, the magnitude of the slopes and the time varying expected variance of three to five years return, average between 11 and 16%, decline considerably as compared to 1926-1985 sample period which average between 21 and 31%. The sub-period 1985-2008 has a weaker U-shaped pattern indicating that the stationary price components may be less important after 1985.
Keywords: stock prices; mean-reverting; market efficiency; Fama and French; stationary price; random walk.
International Journal of Economics and Business Research, 2014 Vol.8 No.2, pp.161 - 174
Received: 06 Jul 2013
Accepted: 26 Jul 2013
Published online: 29 Aug 2014 *