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Do stock markets follow a random walk? New evidence for an old question

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  • Durusu-Ciftci, Dilek
  • Ispir, M. Serdar
  • Kok, Dundar

Abstract

This paper re-examines whether the stock markets are efficient or not by focusing the role of cross-sectional dependency and structural breaks with newly developed panel unit root tests proposed by Lee, Wu, and Yang (2016) and Nazlioglu and Karul (2017). To do this, we used 33 countries stock price indexes for the period 1992M05 – 2018M05. Our results indicate that (i) accounting for cross-sectional dependency and structural breaks play an important role for better understanding the behavior of the stock market indices, (ii) recent testing methodologies provide a strong evidence for the weak-form efficiency of stock markets, (iii) the stationarity property of series is consistent regardless of whether capturing structural shifts as sharp or gradual process, (iv) modelling approach to cross-section dependency matters for deciding whether stock prices can be characterized as random walk or mean reversion processes.

Suggested Citation

  • Durusu-Ciftci, Dilek & Ispir, M. Serdar & Kok, Dundar, 2019. "Do stock markets follow a random walk? New evidence for an old question," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 165-175.
    • Handle: RePEc:eee:reveco:v:64:y:2019:i:c:p:165-175
    DOI: 10.1016/j.iref.2019.06.002
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    More about this item

    Keywords

    Stock price; Efficient market hypothesis; Panel data unit root test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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