Mean reversion in stock prices: A cross-country comparison

This paper analyses the mean-reverting component in real stock prices for twenty countries, using the structural times series model developed by Harvey (1985, 1989), to decompose real stock prices into their permanent, transitory and seasonal components. The empirical results show that there is a large and statistically significant mean-reverting component in each country's real stock prices, as well as a significant seasonal component in nineteen of the twenty countries. For sixteen out of the twenty countries, the transitory component accounts for more than 50 per cent of the total variation in real stock prices. As such, real stock prices are not pure random walk processes.