TY  - JOUR
AU  - Metcalf,Gilbert E.
AU  - Hassett,Kevin A.
TI  - Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion
JF  - National Bureau of Economic Research Technical Working Paper Series
VL  - No. 175
PY  - 1995
Y2  - March 1995
UR  - http://www.nber.org/papers/t0175
L1  - http://www.nber.org/papers/t0175.pdf
N1  - Author contact info:
Gilbert E. Metcalf
Room 3221
Department of the Treasury
Washington, DC 20220
1500 Pennsylvania Ave., NW
Tel: 202-622-0173
E-Mail: gilbert.metcalf@tufts.edu

Kevin Hassett
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
E-Mail: khassett@aei.org
AB  - 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.
ER  -