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Write a 16 pages paper on pricing of derivatives on mean-reverting assets. are stock prices and returns are mean reverting or not. 15 3.6 Data Analysis Methods ……………………………………………………. 16 3.7 Summary …………………………………………………………………… 16 CHAPTER 4 ………………………………………………………………………….……. 17 FIGURES …………………………………………………………………………… 17 4.1 Definition of mean reversion stock prices ……………………………….…….. 17 4.2 Permanent and transitory price components …………………………………… 17 4.3 Properties of multi-period returns ……………………………………….……… 18 4.4 One-period returns ……………………………………………………….…..…. 19 4.5 Multi-period returns ……………………………………………………………. 20 4.6 Higher-order AR model …………………………………………………………. 22 4.7 The relation between mean reversion and covariance stationary ……………….. 23 CHAPTER 5 …………………………………………………………………………………… 25 5. Mean reversion and mean-variance efficient portfolios …………………………. 25 5.1 Outline ………………………………………………………………………….. 25 5.1.1 Expected returns and volatilities of stocks and bonds ………………… 25 5.1.2 Correlation between stock and bond returns …………………………. 26 5.1.3 Risk-free yield curve …………………………………………………. 26 5.1.4 Variance ratio of permanent and transitory returns …………….…….. 26 5.

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