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Mean Reversion And The Asset Allocation Decisions, Sanjiv Jaggia, Satish Thosar
Mean Reversion And The Asset Allocation Decisions, Sanjiv Jaggia, Satish Thosar
Economics
Until fairly recently the conventional wisdom in the finance academic community was that security prices follow a random walk. Some influential papers have uncovered evidence of mean reversion particularly over longer horizons. Siegel (1998) has suggested that given this evidence: "the holding period becomes a crucial issue when the data reveal the mean reversion of the stock returns." In this paper, we explore the pattern of mean reversion in post-World War ll U.S. stock returns and find that it peaks in a 4-year cycle. Given this empirical regularity we show that a buy-and-hold investment strategy, which is appropriate under a …