An Equilibrium Theory of Excess Volatility and Mean Reversion in Stock Market Prices
Alan J. Marcus
Apparent mean reversion and excess volatility in stock market prices can be
reconciled with the Efficient Market Hypothesis by specifying investor
preferences that give rise to the demand for portfolio insurance.
several supposed macro anomalies can be shown to be consistent with a rational
market in a simple and parsimonious model of the economy. Unlike other models
that have derived equilibriwn mean reversion in prices, the model in this paper
does not require that the production side of the economy exhibit mean
reversion. It also predicts that mean reversion and excess volatility will
differ substantially across subperiods.
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