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Threshold Random Walks in the U.S. Stock Market

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Author Info
Zisimos Koustas () (Department of Economics, Brock University)
Jean-Francois Lamarche () (Department of Economics, Brock University)
Apostolos Serletis () (Department of Economics, University of Calgary)

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Abstract

This paper extends the work in Serletis and Shintani (2003) and Elder and Serletis ( 2006) by re-examining the empirical evidence for random walk type behavior in the U.S. stock market. In doing so, it tests the random walk hypothesis by employing unit-root tests that are designed to have more statistical power against nonlinear al- ternatives. The nonlinear feature of our model is re ected by three regimes, one of which is characterized by a unit root process and the random walk hypothesis while the lower and upper regimes are well captured by a stationary autoregressive process with mean reversion and predictability.

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File URL: ftp://139.57.26.208/RePec/pdf/0602.pdf
File Format: application/pdf
File Function: May 2006
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Publisher Info
Paper provided by Brock University, Department of Economics in its series Working Papers with number 0602.

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Length: 12 pages
Date of creation: May 2006
Date of revision: May 2006
Handle: RePEc:brk:wpaper:0602

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Related research
Keywords: Asymmetric time series Threshold adjustment Nonlinear autoregression Autoregression

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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  1. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November. [Downloadable!] (restricted)
    Other versions:
  2. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
    Other versions:
  3. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
    Other versions:
  4. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  5. Chaudhuri, Kausik & Wu, Yangru, 2003. "Random walk versus breaking trend in stock prices: Evidence from emerging markets," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 575-592, April. [Downloadable!] (restricted)
    Other versions:
  6. Kim, Myung Jig & Nelson, Charles R & Startz, Richard, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 515-28, May. [Downloadable!] (restricted)
    Other versions:
  7. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April. [Downloadable!] (restricted)
  8. Richardson, Matthew, 1993. "Temporary Components of Stock Prices: A Skeptic's View," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 199-207, April.
  9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May. [Downloadable!] (restricted)
  10. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 41-66. [Downloadable!] (restricted)
    Other versions:
  11. Pippenger, Michael K & Goering, Gregory E, 1993. "A Note on the Empirical Power of Unit Root Tests under Threshold Processes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 473-81, November.
  12. George Kapetanios & Yongcheol Shin, 2002. "Unit Root Tests in Three-Regime SETAR Models," Working Papers 465, Queen Mary, University of London, Department of Economics. [Downloadable!]
  13. Bec, Frederique & Guay, Alain & Guerre, Emmanuel, 2008. "Adaptive consistent unit-root tests based on autoregressive threshold model," Journal of Econometrics, Elsevier, vol. 127(1), pages 94-133, January. [Downloadable!] (restricted)
  14. Frederic Bec & Melika Ben Salem & Marine Carrasco, 2004. "Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 382-395, October. [Downloadable!] (restricted)
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