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Mean reversion in stock prices of seven Asian stock markets: Unit root test and stationary test with Fourier functions

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  • Wang, Juan
  • Zhang, Dongxiang
  • Zhang, Jian

Abstract

This paper investigates whether stock prices in seven Asian stock markets can be characterized as random walk or mean reversion processes over the period December 1990 to March 2013. A Lagrange Multiplier (LM) Fourier unit root test proposed by Enders and Lee (2012) and a stationary test with a Fourier function proposed by Becker et al. (2006) are employed to approximate smooth structural breaks. The results of LM Fourier unit root test show that stock prices in all these seven stock markets demonstrate significant mean reversion. The results of the stationary test can be divided into two parts. When a level term is included in the model, the stock price of Thailand is mean-reverting while stock prices of other regions (Mainland China, HK, China, Japan, South Korea, Malaysia and Singapore) are non-stationary; when a trend term is included the stock prices in seven stock markets are all mean reversion processes.

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  • Wang, Juan & Zhang, Dongxiang & Zhang, Jian, 2015. "Mean reversion in stock prices of seven Asian stock markets: Unit root test and stationary test with Fourier functions," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 157-164.
    • Handle: RePEc:eee:reveco:v:37:y:2015:i:c:p:157-164
    DOI: 10.1016/j.iref.2014.11.020
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    More about this item

    Keywords

    Asian stock markets; Mean reversion; Unit root test; Stationary test; Fourier function;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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