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Could the Stock Market Adjust Itself? An Empirical Study Based on Mean Reversion Theory

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  • Li Shuangjie

    (School of Economics and Management, Beijing University of Technology, Beijing100124, China)

  • Hu Xuefeng

    (School of Economics and Management, Beijing University of Technology, Beijing100124, China)

  • Wang Liming

    (UCD Irish Institute for Chinese Studies, University College Dubin, UCD Belfield, Dublin, 4, Ireland)

Abstract

This paper mainly studies whether and how stock prices fluctuate around their intrinsic values. Based on data from 10 stock markets for the period between 2000 and 2018, we demonstrate that the relative price fluctuates around and approaches the intrinsic value in the long term. For the ten markets, the relative price crosses the intrinsic value on average once in 3 ∼ 4 years. Profitability growth is a key factor in rising stock prices, but the level of valuations in the market has a regulatory effect to the growth of price in the future: For every 1 % increase in valuation, the price tends to decline by 0.26% in the next year, 0.74% in the next 3 years.

Suggested Citation

  • Li Shuangjie & Hu Xuefeng & Wang Liming, 2020. "Could the Stock Market Adjust Itself? An Empirical Study Based on Mean Reversion Theory," Journal of Systems Science and Information, De Gruyter, vol. 8(2), pages 97-115, April.
    • Handle: RePEc:bpj:jossai:v:8:y:2020:i:2:p:97-115:n:1
    DOI: 10.21078/JSSI-2020-097-19
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