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Measuring the Speed of Convergence of Stock Prices: A Nonparametric and Nonlinear Approach

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  • Hyeongwoo Kim
  • Deockhyun Ryu

Abstract

This paper evaluates the speed of convergence across national stock markets employing a nonlinear, nonparametric stochastic model of relative stock prices. We use operational algorithms for estimating general measures of persistence of the relative stock price that are based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). Using G7 countries¡¯ stock indices, we obtain strong empirical evidence in favor of the contrarian strategy for France, Germany, Italy, and the UK relative to the US market, while our results imply quite limited usefulness of the strategy for Canada and Japan. Further, we obtain fairly fast convergence rates toward the equilibrium for the former group.

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  • Hyeongwoo Kim & Deockhyun Ryu, 2013. "Measuring the Speed of Convergence of Stock Prices: A Nonparametric and Nonlinear Approach," Auburn Economics Working Paper Series auwp2013-06, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2013-06
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    Cited by:

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    3. Adedoyin Isola LAWAL & Ezekiel OSENI & Abiola John ASALEYE & Bukola LAWAL-ADEDOYIN & Rachael OJEKA-JOHN, 2021. "Is the Stock Market Efficient? Evidence from Nonlinear Unit Root Tests for Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(5), pages 384-395, May.
    4. Parthajit Kayal & S. Maheswaran, 2018. "Speed of Price Adjustment towards Market Efficiency: Evidence from Emerging Countries," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(1_suppl), pages 112-135, April.
    5. Parthajit Kayal & Sayanti Mondal, 2020. "Speed of Price Adjustment in Indian Stock Market: A Paradox," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(4), pages 453-476, December.
    6. Boco, Hervé & Germain, Laurent & Rousseau, Fabrice, 2016. "Heterogeneous noisy beliefs and dynamic competition in financial markets," Economic Modelling, Elsevier, vol. 54(C), pages 347-363.

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    More about this item

    Keywords

    Speed of Convergence; Contrarian Strategy; Short Memory in Mean; Short-Memory in Distribution; mixing; Max Half-Life; Max Quarter-Life;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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