Mean Reversion at The Dutch Stock Exchange?

Abstract

This paper investigates behavior in monthly and yearly returns at the Dutch stock exchange for the period 1947 – 1992. Empirical variance ratios of different return horizons are confronted with simulated probability distributions. Three different simulation procedures are used: randomization, bootstrap and drawings from a random walk process.

The empirical results show significant mean aversion in monthly stock returns. This indicates that during the investigated period there was positive autocorrelation in monthly stock returns. For longer horizons, results were less clear: point estimates again indicate mean aversion, but the results are not statistically significant. These findings are in line with earlier research on US equity markets by Lo & MacKinlay [1988] and Kim, Nelson & Startz [1991], but in contrast with Poterba & Summers [1988].

I am grateful to Paul van Aalst, Winfried Hallerbach and Jan van der Meulen for their useful comments, and Leon van der Torre for work on the simulation program. This paper appeared in a slightly different version in Financiering en Belegging 1993 (deel 16), edited by D.J.E. Baestaens and W.M. van den Berg.