NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion

Gilbert E. Metcalf, Kevin A. Hassett

NBER Technical Working Paper No. 175
Issued in March 1995
NBER Program(s):   PE

Many recent theoretical papers have come under attack for modeling prices as Geometric Brownian Motion. This process can diverge over time, implying that firms facing this price process can earn infinite profits. We explore the significance of this attack and contrast investment under Geometric Brownian Motion with investment assuming mean reversion. While analytically more complex, mean reversion in many cases is a more plausible assumption, allowing for supply responses to increasing prices. We show that cumulative investment is generally unaffected by the use of a mean reversion process rather than Geometric Brownian Motion and provide an explanation for this result.

download in pdf format
   (613 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/t0175

Published: Journal of Economic Dynamics and Control, vol.19, 1995, pp.1471-1488.

Users who downloaded this paper also downloaded these:
Cummins, Hassett, and Hubbard w5232 Tax Reforms and Investment: A Cross-Country Comparison
Auerbach, Hassett, and Sodersten w5189 Taxation and Corporate Investment: The Impact of the 1991 Swedish Tax Reform
Auerbach and Hassett w3619 Tax Policy and Business Fixed Investment in the United States
Hassett and Hubbard w6676 Are Investment Incentives Blunted by Changes in Prices of Capital Goods?
Marcus w3106 An Equilibrium Theory of Excess Volatility and Mean Reversion in Stock Market Prices
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us