cyclingscholar

Reversion to the Mean for Equities

A couple comments. First as a an economist and finance person:

Is there any REASON to suggest a relationship between market capitalization and GDP? Given fluctuating levels of equity use by corporations and the expansion of the number of firms publicly traded, the huge burst in the 1990s might just have been a 'counting' phenomena. We counted market cap where before the firms were private or at least not publicly listed.

Second: As a statistician: You have a grand total of '5' data points. Keep in mind you are trying to 'forecast' MEAN REVERSION. You have four examples of 'excess valuation upon which you have based your premise-- roughly 1929, 1937, 1959 and 1966. Not a tremendous amount of data upon which to base a premise. BAsed upin your data I would have concluded, LOOKING FORWARD, that the market was overvalued and due for MEAN REVERSION....in about 1995...when the dow was at 4000.

Not very helpful with timing.

cyclingscholar