Abstract

For U.S. stock prices, evidence of mean reversion over long horizons is mixed, possibly due to the lack of a reliable long time series. Using additional cross-sectional power gained from national stock-index data of eighteen countries during the 1969-1996 period, we find strong evidence of mean reversion in relative stock-index prices. Results for US$ stock-index prices with reinvested dividends suggest that the speed of reversion is well approximated as constant across countries, and imply a half life of 3 to 32 years. Parametric contrarian investment strategies that exploit mean reversion across national stock indices outperform the buy-and-hold and standard contrarian strategies.