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Nonlinear mean reversion in stock prices: evidence from Asian markets

  • Kian-Ping Lim
  • Venus Khim-Sen Liew

Utilizing the standard linearity test of Luukkonen et al . (1988), the linear nature of all the Asian stock indices has been formally rejected. This finding warrants use of the nonlinear stationary test of Kapetanois et al . (2003), which is also constructed in the STAR framework, to investigate the mean reverting property of the stock prices series. As a whole, this study not only found convincing evidence of a nonlinear mean reverting pattern in all the Asian stock indices, but also demonstrates the risk of drawing the wrong inferences on mean reversion when the ADF test is applied to data governed by nonlinearity.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

Volume (Year): 3 (2007)
Issue (Month): 1 (January)
Pages: 25-29

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Handle: RePEc:taf:apfelt:v:3:y:2007:i:1:p:25-29
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  1. Myung Jig Kim & Charles R. Nelson & Richard Startz, 1988. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," NBER Working Papers 2795, National Bureau of Economic Research, Inc.
  2. Venus Khim-sen Liew & Ahmad Zubaidi Baharumshah & Terence Tai-leung Chong, 2003. "Are Asian Real Exchange Rates Stationary?," International Finance 0307002, EconWPA, revised 01 Nov 2004.
  3. Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1387-1392.
  4. Dirk Te Velde, 2001. "Balance of payments prospects in EMU," NIESR Discussion Papers 178, National Institute of Economic and Social Research.
  5. 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.
  6. Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, 04.
  7. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
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