AVERAGE CROSSING TIME: AN ALTERNATIVE CHARACTERIZATION MEAN AVERSION AND REVERSION

Back to Page Authors: John Donaldson, Natalia Gershun, Rajnish Mehra

Keywords: Asset Pricing, Return Predictability, Mean Reversion, Average Crossing Time

Abstract: We reflect on the properties of mean reversion and mean aversion in stock prices and returns within a class of dynamic stochastic general equilibrium macroeconomic models. We show that both mean aversion and reversion in financial time series naturally arise in a stationary environment. We propose an alternative metric, the ‘Average Crossing Time’ that both unifies these concepts and allows a better understanding of the probabilistic structure underlying each. Ceteris paribus, mean reverting processes have a relatively shorter average crossing time as compared to mean averting processes.