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A GARCH model for testing market efficiency

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  • Narayan, Paresh Kumar
  • Liu, Ruipeng
  • Westerlund, Joakim

Abstract

In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40% of the stocks, and only in four out of the nine sectors the null is rejected for over 50% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.

Suggested Citation

  • Narayan, Paresh Kumar & Liu, Ruipeng & Westerlund, Joakim, 2016. "A GARCH model for testing market efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 121-138.
  • Handle: RePEc:eee:intfin:v:41:y:2016:i:c:p:121-138
    DOI: 10.1016/j.intfin.2015.12.008
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    Cited by:

    1. Afees A. Salisu & Umar B. Ndako & Tirimisiyu F. Oloko & Lateef O. Akanni, 2016. "Unit root modeling for trending stock market series," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 16(2), pages 82-91, June.
    2. Mishra, Vinod & Smyth, Russell, 2017. "Conditional convergence in Australia's energy consumption at the sector level," Energy Economics, Elsevier, vol. 62(C), pages 396-403.
    3. repec:eee:reveco:v:49:y:2017:i:c:p:453-483 is not listed on IDEAS
    4. Batiston Marques, Thales & Seixas dos Santos, Nelson, 2016. "Do Political News Affect Financial Market Returns? Evidences from Brazil," MPRA Paper 75530, University Library of Munich, Germany.
    5. repec:eee:rensus:v:78:y:2017:i:c:p:554-587 is not listed on IDEAS
    6. repec:eee:ecmode:v:68:y:2018:i:c:p:661-673 is not listed on IDEAS
    7. repec:eee:ememar:v:34:y:2018:i:c:p:124-142 is not listed on IDEAS

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