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The impact of mean reversion model on portfolio investment strategies: Empirical evidence from emerging markets

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  • Akarim, Yasemin Deniz
  • Sevim, Serafettin
Abstract
Investors use mean reversion model to make decisions on which stocks should be taken in their portfolios according to their mean values. The first goal of the paper is to test the validity of the mean reversion model in emerging markets. Second, it aims to determine the best portfolio investment strategy on the validity of the mean reversion model. As a result of panel regression analysis, we find that the mean reversion model is valid in all of the emerging countries in the sample. This result implies that emerging markets are not efficient even in weak form. On the validity of the mean reversion model, we find that Max3–Min3 portfolio has recorded the best performance and contrarian portfolio is the best portfolio investment strategy. The paper makes contribution to the literature in terms of providing the information about which portfolio investment strategy has the best performance on the validity of the mean reversion model.

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  • Akarim, Yasemin Deniz & Sevim, Serafettin, 2013. "The impact of mean reversion model on portfolio investment strategies: Empirical evidence from emerging markets," Economic Modelling, Elsevier, vol. 31(C), pages 453-459.
    • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:453-459
    DOI: 10.1016/j.econmod.2012.11.028
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    3. Nartea, Gilbert V. & Valera, Harold Glenn A. & Valera, Maria Luisa G., 2021. "Mean reversion in Asia-Pacific stock prices: New evidence from quantile unit root tests," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 214-230.
    4. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    5. Gao, Jianjun & Li, Duan & Xie, Jinyan & Yang, Yiwen & Yao, Jing, 2024. "When Prospect Theory Meets Mean-Reverting Asset Returns: A Behavioral Dynamic Trading Model," Journal of Banking & Finance, Elsevier, vol. 162(C).
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    8. Corbet, Shaen & Katsiampa, Paraskevi, 2020. "Asymmetric mean reversion of Bitcoin price returns," International Review of Financial Analysis, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Mean reversion; Emerging markets; Portfolio strategies; Panel data analysis;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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