Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322874 
Year of Publication: 
2012
Series/Report no.: 
Discussion Papers Series No. 12-07
Publisher: 
Utrecht University, Utrecht School of Economics, Tjalling C. Koopmans Research Institute, Utrecht
Abstract: 
This paper discusses the implications of mean reversion in stock prices for longterm investors such as pension funds. We start with a general definition of a meanreverting price process and explain how mean reversion in stock prices is related to mean reversion in stock returns. Subsequently, we show that mean reversion makes stocks less risky for investors with long investment horizons. Next, we consider a mean-variance efficient investor and show how mean reversion in stock prices affects such an investor's optimal portfolio weights. Finally, we discuss the implications of our findings for the investment decisions of long-term investors.
Subjects: 
mean-variance efficiency
optimal portfolio weights
pension funds
risk-aversion
variance of stock returns
Document Type: 
Working Paper

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