Temporary Components of Stock Prices: A Skeptic's View

Abstract

Recent empirical work has uncovered U-shaped patterns of large magnitude in the serial-correlation estimates of multiyear stock returns. The current literature in finance has taken this evidence to mean that there exists a temporary component of stock prices. This article provides an alternative explanation regarding these findings. Specifically, we show that the patterns in serial-correlation estimates and their magnitude observed in previous studies should be expected under the null hypothesis of serial independence.

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