Mean Reversion and Self-Valuation of European Common Stocks

This article presents empirical evidence that European stock markets independently determine the values of their listed common stocks. It shows that European common stocks establish their own discount rates, which in turn determine their equity values. The study models mean reversion in continuous time and demonstrates its minimal impact on prediction accuracy, indicating the efficiency of self-valuation. Mean reversion of current stock prices is an activity where investors assess the values of common stocks listed on an exchange. The speed of mean reversion of a current stock price determines the discount rate. The continuous-time first-order autoregressive model captures both the mean reversion of a current stock price and the volatility due to mean reversion, describing the dynamics of mean reversion in pricing. The closing prices of European common stocks are shown to be volatile, indicating the inherent risks of investing in common stocks.