The xt random variable thus moves slowly (depending on ϕ), with a tendency to return to its mean value. Lastly, mean reversion is captured by assuming cov(ηt+1, ut+1)=σηu<0, which translates, as per below, into a statement about risky return autocorrelations:



a high return today reduces expected returns next period. Thus,


in contrast to the independence case. More generally, for all horizons k,


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