Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K.

Abstract

ABSTRACT The evidence of slowly mean‐reverting components in stock prices has been controversial. The hypothesis of stock price mean‐reversion is tested using a regression model that yields the highest asymptotic power among a class of regression tests. Although the evidence that the equally weighted index of stocks exhibits mean‐reversion is significant in the period 1926–1988, this phenomenon is entirely concentrated in January. In the post‐war period both the equally weighted and the value‐weighted indices exhibit seasonal mean‐reversion in January. A similar phenomenon is also observed for the equally weighted index of stocks traded on the London Stock Exchange.

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