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Mean reversion and long memory in African stock market prices

  • Emmanuel Anoruo
  • Luis Gil-Alana


We examine the behavior of stock market prices in several African countries by means of fractionally integrated techniques. In doing so, we can test the random walk hypothesis along with other approaches like the mean reversion in these markets. Our results can be summarized as follows: we cannot find evidence of mean reversion in any single market, and evidence of long memory returns is obtained in the cases of Egypt and Nigeria, and, in a lesser extent in Tunisia, Morocco and Kenya. Permitting the existence of a structural break in the data, the break dates take place in the earlier 2000s in the majority of the cases, and evidence of mean reversion seems to have taken place in the periods before the breaks in most of the countries. If we focus on the absolute and squared returns, evidence of long memory is obtained in Nigeria and Egypt. Thus, for these two countries, a long memory model incorporating positive fractional degrees of integration in both the level and the volatility process should be considered.

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Article provided by Springer in its journal Journal of Economics and Finance.

Volume (Year): 35 (2011)
Issue (Month): 3 (July)
Pages: 296-308

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Handle: RePEc:spr:jecfin:v:35:y:2011:i:3:p:296-308
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  1. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
  2. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  3. John Barkoulas & Christopher Baum & Nickolaos Travlos, 2000. "Long memory in the Greek stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 10(2), pages 177-184.
  4. Gil-Alana, L. A. & Robinson, P. M., 1997. "Testing of unit root and other nonstationary hypotheses in macroeconomic time series," Journal of Econometrics, Elsevier, vol. 80(2), pages 241-268, October.
  5. Koong, C.S. & Tsui, Albert K. & Chan, W.S., 1997. "On tests for long memory in Pacific Basin stock returns," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 43(3), pages 445-449.
  6. Luis A. Gil-Alana, 2006. "Fractional integration and structural breaks at unknown periods of time," Faculty Working Papers 16/06, School of Economics and Business Administration, University of Navarra.
  7. Jussi Tolvi, 2003. "Long memory and outliers in stock market returns," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 495-502.
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  9. Paul Alagidede & Theodore Panagiotidis, 2009. "Modelling stock returns in Africa’s emerging equity markets," Discussion Paper Series 2009_01, Department of Economics, University of Macedonia, revised Jan 2009.
  10. Sadique, Shibley & Silvapulle, Param, 2001. "Long-Term Memory in Stock Market Returns: International Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(1), pages 59-67, January.
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  13. repec:cep:stiecm:/2001/421 is not listed on IDEAS
  14. Rehim Kili, 2004. "On the long memory properties of emerging capital markets: evidence from Istanbul stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 915-922.
  15. Cheung, Yin-Wong & Lai, Kon S., 1995. "A search for long memory in international stock market returns," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 597-615, August.
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