Permanent and Temporary Components of Stock Prices
1988/04/01 by Eugene F. Fama, Kenneth R. French · 3,117 citations
Economics, Econometrics and Finance · Mathematics · #Autocorrelation #Econometrics #Economics #Excess return #Financial Markets and Investment Strategies #Financial economics #Geography #Housing Market and Economics #Mathematics #Mean reversion #Monetary Policy and Economic Impact #Statistics #Stock (firearms)
paper · doi:10.1086/261535
published in Journal of Political Economy 96(2), 246-273 (University of Chicago Press)
openalex publication_date 1988/04/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
Abstract
A slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns. The autocorrelation is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns. In tests for the 1926-85 period, large negative autocorrelations for return horizons beyond a year suggest that predictable price variation due to mean reversion accounts for large fractions of 3-5-year return variances. Predictable variation is estimated to be about 40 percent of 3-5-year return variances for portfolios of small firms. The percentage falls to around 25 percent for portfolios of large firms.
Citations
Cited by
- Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency
- Investor Psychology and Security Market Under‐ and Overreactions
- Business Strategy, Financial Reporting Irregularities, and Audit Effort
- Identifying Small Mean Reverting Portfolios
- Market Ecology, Pareto Wealth Distribution and Leptokurtic Returns in Microscopic Simulation of the LLS Stock Market Model
- Empirical investigation of state-of-the-art mean reversion strategies for equity markets
- A New Multivariate Predictive Model for Stock Returns
- FTSCommDetector: Discovering Behavioral Communities through Temporal Synchronization
- The Efficient Market Hypothesis and Its Critics
- Computational Methods and Verification Theorem for Portfolio-Consumption Optimization under Exponential O-U Dynamics
- Forecasting stock indices: a comparison of classification and level estimation models
- Stock Price Prediction using Principle Components
- Opinion Dynamics and Price Formation: a Nonlinear Network Model
- Transient fads and the crash of ′87
- Investor Sentiment in the Stock Market
- Time Travel is Cheating: Going Live with DeepFund for Real-Time Fund Investment Benchmarking
- The size and power of the variance ratio test in finite samples
- Confidence bands in nonparametric time series regression
- The three-pass regression filter: A new approach to forecasting using many predictors
- Market Expectations in the Cross‐Section of Present Values
- Mean reversion in stock prices
- A model of investor sentiment1We are grateful to the NSF for financial support, and to Oliver Blanchard, Alon Brav, John Campbell (a referee), John Cochrane, Edward Glaeser, J.B. Heaton, Danny Kahneman, David Laibson, Owen Lamont, Drazen Prelec, Jay Ritter (a referee), Ken Singleton, Dick Thaler, an anonymous referee, and the editor, Bill Schwert, for comments.1
- An Equilibrium Model of the Crash
- The Noise Trader Approach to Finance
- HOW TO USE THE HOLES IN BLACK‐SCHOLES
- Self-affinity in financial asset returns
- Explaining Apparent Stock Market Anomalies
- A Better Alternative to Piecewise Linear Time Series Segmentation
- Dynamic modeling of mean-reverting spreads for statistical arbitrage
- Stock price prediction using principal components. [europepmc]
- Pricing Constraint and the Complexity of IPO Timing in the Stock Market: A Dynamic Game Analysis. [europepmc]
- The efficiency of CO 2 market in the phase III EU ETS: analyzing in the context of a dynamic approach. [europepmc]
- Financial Return Distributions: Past, Present, and COVID-19. [europepmc]
- Contagion or interdependence? Comparing spillover indices. [europepmc]
- Mean Reversion and Heavy Tails: Characterizing Time-Series Data Using Ornstein–Uhlenbeck Processes and Machine Learning [europepmc]
- Factor investing and asset allocation strategies: a comparison of factor versus sector optimization [europepmc]
Related