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

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Author Info

  • Paresh Kumar Narayan
  • Seema Narayan

Abstract

Purpose – There 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/approach – The 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. Findings – The main finding is that there is no mean reversion of stock prices, consistent with the efficient market hypothesis. Research limitations/implications – One 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 implications – The findings have implications for econometric modelling, in particular forecasting. Originality/value – This 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.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

Volume (Year): 24 (2007)
Issue (Month): 3 (September)
Pages: 233-244

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Handle: RePEc:eme:sefpps:v:24:y:2007:i:3:p:233-244

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Related research

Keywords: Financial forecasting; Stock markets; Stock prices; Stock returns;

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Cited by:
  1. Siow-hooi Tan & Muzafar-shah Habibullah & Roy-wye-leong Khong, 2010. "Non-linear unit root properties of stock prices: Evidence from India, Pakistan and Sri Lanka," Economics Bulletin, AccessEcon, vol. 30(1), pages 274-281.
  2. Lee, Chien-Chiang & Lee, Jun-De & Lee, Chi-Chuan, 2010. "Stock prices and the efficient market hypothesis: Evidence from a panel stationary test with structural breaks," Japan and the World Economy, Elsevier, vol. 22(1), pages 49-58, January.
  3. Khaled, Mohammed & Keef, Stephen, 2011. "On the dynamics of international stock market efficiency," Working Paper Series 1991, Victoria University of Wellington, School of Economics and Finance.
  4. Khurshid Kiani, 2010. "Predictable Signals in Excess Returns: Evidence from Non-Gaussian State Space Models," Economics Bulletin, AccessEcon, vol. 30(2), pages 1217-1232.
  5. repec:ebl:ecbull:v:30:y:2010:i:1:p:274-281 is not listed on IDEAS
  6. Kauko, Karlo, 2010. "The feasibility of through-the-cycle ratings," Research Discussion Papers 14/2010, Bank of Finland.
  7. Alexakis, Christos, 2010. "Long-run relations among equity indices under different market conditions: Implications on the implementation of statistical arbitrage strategies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 389-403, October.

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