NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Average Crossing Time: An Alternative Characterization of Mean Aversion and Reversion

John B. Donaldson, Rajnish Mehra

NBER Working Paper No. 25519
Issued in January 2019
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

We evaluate the properties of mean reversion and mean aversion in asset prices and returns as commonly characterized in the finance literature. The study is undertaken within a class of well-known dynamic stochastic general equilibrium models and shows that the mean reversion/aversion distinction is largely artificial. We then propose an alternative measure, the ‘Average Crossing Time’ that both unifies these concepts and provides an alternative characterization. Ceteris paribus, mean reverting processes have a relatively shorter average crossing time as compared to mean averting processes.

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Document Object Identifier (DOI): 10.3386/w25519

 
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