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

Author

Listed:
  • 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 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.

Suggested Citation

  • Paresh Kumar Narayan & Seema Narayan, 2007. "Mean reversion in stock prices: new evidence from panel unit root tests," Studies in Economics and Finance, Emerald Group Publishing, vol. 24(3), pages 233-244, August.
  • Handle: RePEc:eme:sefpps:v:24:y:2007:i:3:p:233-244
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    Citations

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    Cited by:

    1. Tülin Anlas & Cengiz Toraman, 2016. "Analysing the Efficiency of the Turkish Stock Market with Multiple Structural Breaks," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(12), pages 721-740, December.
    2. repec:ebl:ecbull:v:30:y:2010:i:1:p:274-281 is not listed on IDEAS
    3. Kauko, Karlo, 2010. "The feasibility of through-the-cycle ratings," Research Discussion Papers 14/2010, Bank of Finland.
    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. 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.
    6. Ivanov, Ivan & Kabaivanov, Stanimir & Bogdanova, Boryana, 2016. "Stock market recovery from the 2008 financial crisis: The differences across Europe," Research in International Business and Finance, Elsevier, vol. 37(C), pages 360-374.
    7. 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.
    8. 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.
    9. Mohammed S. Khaled & Stephen P. Keef, 2014. "On the dynamics of international stock market efficiency," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-11, December.

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