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| Author: | Chelley-Steeley, P. |
| Title: | Mean Reversion in the Short Horizon Returns of UK Portfolios |
| Journal: | Journal of Business Finance and Accounting
2001 : JAN-MAR, VOL. 28:1-2, p. 107-126 |
| Index terms: | PORTFOLIO MANAGEMENT AUTOCORRELATION UNITED KINGDOM |
| Language: | eng |
| Abstract: | This paper will show that short horizon stock returns for UK portfolios are more predictable than suggested by sample autocorrelation co-efficients. Four capitalisation- based portfolios are constructed for the period 1976-1991. It is shown that the first order autocorrelation coefficient of monthly returns can explain no more than 10% of the variation in monthly portfolio returns. The authors construct a model, which exploits the mean reverting characteristics of monthly portfolio returns. Using this model the authors forecast future monthly portfolio returns. When compared to forecasts that utilise the autocorrelation statistic the model which exploits the mean reverting characteristics of monthly portfolio returns can forecast future returns better than the autocorrelation statistic, both in and out of sample. |
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