Friday, July 18, 2008

Asset Prices Cannot be RW: Are they Mean Reverting, Trending (Serially correlated), or one or the other dominates at a given time?


An asset process would be degenerate when it reach zero. For the asset value to be positive, the drift also needs to become zero which means that the the asset price Bachelier process. In the case of a stock, extremely large trading multiples with respect to valuations are not seen. Therefore, my hunch is that stocks mean revert to its valuation. Price also could have a momentum element.

Any opinions?

Best regards, Suminda Sirinath Salpitikorala Dharmasena

NB: through my initial argument seams to have flaws. Some that I realised are corrected. There is more that I can add but I have left them out.

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