Mean reversion versus random walk in G7 stock prices evidence from multiple trend break unit root tests

2007 ◽  
Vol 17 (2) ◽  
pp. 152-166 ◽  
Author(s):  
Paresh Kumar Narayan ◽  
Russell Smyth
Keyword(s):  
Random Walk ◽  
Unit Root ◽  
Stock Prices ◽  
Mean Reversion ◽  
Unit Root Tests

scholarly journals UNIT ROOT TEST WITH HIGH-FREQUENCY DATA

2021 ◽  
pp. 1-59
Author(s):  
Sébastien Laurent ◽  
Shuping Shi
Keyword(s):  
Random Walk ◽  
Unit Root ◽  
High Frequency ◽  
Asset Prices ◽  
Composite Index ◽  
Mean Reversion ◽  
Unit Root Tests ◽  
High Frequency Data ◽  
Frequency Data ◽  
Intraday Data

Deviations of asset prices from the random walk dynamic imply the predictability of asset returns and thus have important implications for portfolio construction and risk management. This paper proposes a real-time monitoring device for such deviations using intraday high-frequency data. The proposed procedures are based on unit root tests with in-fill asymptotics but extended to take the empirical features of high-frequency financial data (particularly jumps) into consideration. We derive the limiting distributions of the tests under both the null hypothesis of a random walk with jumps and the alternative of mean reversion/explosiveness with jumps. The limiting results show that ignoring the presence of jumps could potentially lead to severe size distortions of both the standard left-sided (against mean reversion) and right-sided (against explosiveness) unit root tests. The simulation results reveal satisfactory performance of the proposed tests even with data from a relatively short time span. As an illustration, we apply the procedure to the Nasdaq composite index at the 10-minute frequency over two periods: around the peak of the dot-com bubble and during the 2015–2106 stock market sell-off. We find strong evidence of explosiveness in asset prices in late 1999 and mean reversion in late 2015. We also show that accounting for jumps when testing the random walk hypothesis on intraday data is empirically relevant and that ignoring jumps can lead to different conclusions.

scholarly journals Random Walk in Emerging Asian Stock Markets

2016 ◽  
Vol 9 (1) ◽  
pp. 20
Author(s):  
Muneer Shaik ◽  
S. Maheswaran
Keyword(s):  
Random Walk ◽  
Unit Root ◽  
Stock Prices ◽  
Stock Markets ◽  
Global Financial Crisis ◽  
Unit Root Tests ◽  
Optimal Test ◽  
Market Prices ◽  
Crisis Period ◽  
Random Walk Hypothesis

<p>The random walk hypothesis is an important area of research in finance and many tools have been proposed to investigate the behaviour of the fluctuations in stock prices. However, a detail study on emerging Asian stock markets which employ the various unit root tests has not been done. In this paper, we employ six different unit root tests such as the Augmented Dickey and Fuller test (1979), Phillips and Perron test (1988), Kwiatkowski-Phillips-Schmidt-Shin test(1992), Dickey-Fuller GLS (ERS) test (1996), Elliot-Rothenberg-Stock Point-Optimal test (1996) and Ng and Perron (2001) unit root tests on 10 emerging Asian stock markets to detect for the presence of a random walk in stock prices. We have conducted the unit root tests during different sub-sample time periods of global financial crisis to check for robustness. To be specific, we have found that during the overall sample period (2001-2015) 8 out of 10 Asian stock markets and during the pre-crisis period (2001-2007) all the 10 Asian stock market prices do follow random walk according to the unit root tests under consideration. However, during the crisis &amp; post-crisis period (2008-2015) we have found only 5 out of 10 Asian markets follow the random walk movement based on unit root tests.</p>

Mean reversion in stock prices: new evidence from panel unit root tests

2007 ◽  
Vol 24 (3) ◽  
pp. 233-244 ◽  
Author(s):  
Paresh Kumar Narayan ◽  
Seema Narayan
Keyword(s):  
Unit Root ◽  
Stock Prices ◽  
Structural Breaks ◽  
Mean Reversion ◽  
Efficient Market Hypothesis ◽  
Unit Root Tests ◽  
Panel Unit Root Tests ◽  
Test Statistic ◽  
Panel Unit Root ◽  
Content Type

PurposeThere are several studies that investigate evidence for mean reversion in stock prices. However, there is no consensus as to whether stock prices are mean reverting or random walk (unit root) processes. The goal of this paper is to re‐examine mean reversion in stock prices.Design/methodology/approachThe authors use five different panel unit root tests, namely the Im, Pesaran and Shin t‐bar test statistic, the Levin and Lin test, the Im, Lee, and Tieslau Lagrangian multiplier test statistic, the seemingly unrelated regression test, and the multivariate augmented Dickey Fuller test advocated by Taylor and Sarno.FindingsThe main finding is that there is no mean reversion of stock prices, consistent with the efficient market hypothesis.Research limitations/implicationsOne issue not considered by this study is the role of structural breaks. It may be the case that the efficient market hypothesis is contingent on structural breaks in stock prices. Future studies should model structural breaks.Practical implicationsThe findings have implications for econometric modelling, in particular forecasting.Originality/valueThis paper adds to the scarce literature on the mean reverting property of stock prices based on panel data; thus, it should be useful for researchers.

Do Asian Stock Markets Follow a Random Walk? Evidence from LM Unit Root Tests with One and Two Structural Breaks

2007 ◽  
Vol 10 (01) ◽  
pp. 15-31 ◽  
Author(s):  
Hooi Hooi Lean ◽  
Russell Smyth
Keyword(s):  
Random Walk ◽  
Lagrange Multiplier ◽  
Unit Root ◽  
Stock Prices ◽  
Structural Breaks ◽  
Structural Break ◽  
Unit Root Test ◽  
Unit Root Tests ◽  
Asian Countries ◽  
Random Walk Hypothesis

This paper applies univariate and panel Lagrange Multiplier (LM) unit root tests with one and two structural breaks to examine the random walk hypothesis for stock prices in eight Asian countries. The results from the univariate LM unit root tests and panel LM unit root test with one structural break suggest that stock prices in each country is characterized by a random walk, but the findings from the panel LM unit root test with two structural breaks suggest that stock prices in the eight countries are mean reverting.

scholarly journals Random Walk Hypothesis for Stock Prices in Fiji

2021 ◽  
Vol 13 (2) ◽  
pp. 79-88
Author(s):  
Janesh Sami
Keyword(s):  
Random Walk ◽  
Stock Market ◽  
Unit Root ◽  
Stock Prices ◽  
Structural Break ◽  
Weak Form ◽  
Efficient Market Hypothesis ◽  
Random Walk Hypothesis ◽  
Augmented Dickey Fuller ◽  
Historical Movement

The main goal of this paper is to investigate the random walk hypothesis in Fiji using monthly data from January 2000 to October 2017. Applying augmented Dickey Fuller (ADF 1979, 1981) and Phillips-Perron (1988), Zivot-Andrews (1992), and Narayan and Popp (2010) unit root tests, this study finds that stock prices is best characterized as non-stationary. The estimated multiple structural break dates in the stock prices corresponds with devaluation of Fijian dollar by 20 percent in 2009 and General Elections in September 2014, which Fiji First Party won by majority votes. The empirical results indicate that stock prices are best characterized as a unit root (random walk) process, indicating that the weak-form efficient market hypothesis holds in Fiji’s stock market. Hence, it will be difficult to predict future returns based on historical movement of stock prices in Fiji’s stock market.

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