IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

A Bayes Inference Approach to Testing Mean Reversion in the Swedish Stock Market

  • Andreas Graflund

    (Lund University)

Registered author(s):

    This paper makes use of the Bayesian approach to test for mean reversion in the Swedish stock market via Gibbs sampling. We use a sample of eighty years of monthly Swedish stock market returns including dividends from December 1918 to December 1998. We test for mean reversion in the short-run using two up to twelve months' horizons and in the long-run using yearly horizons up to ten years. Previous evidence of mean reversion via variance ratio is controversial because the test is only valid under the assumption of constant expected return. The return series from financial markets are well known to exhibit time varying volatility. Thus, the findings of mean reversion in the Swedish stock market might be explained by time-variation, or regime switches, in volatility. Hence we assume two regimes: low and high volatility and we let the volatility regimes be described by a two-state Hidden Markov Model, were the states are unobservable parameters. The Bayesian Gibbs sampling framework is advantageous as is allows us to make statistical inference of the parameters of interest without direct estimation of the likelihood function. This is pleasant property as we avoid the problem of estimating sometimes difficult likelihood functions. The result of our analysis offsets previous findings of mean reversion in the Swedish stock market. By simply account for the heteroscedasticty of the data and taking estimation bias into account we can not find any support of mean reversion. On the contrary the Swedish stock market can be characterized by two regimes, a tranquil and a volatile, and within the regimes the stock market is random. This finding is in line with what have been found on the U.S. stock market 1926-1986. Thus, accounting for time-variation in volatility and estimation bias improves the variance ratio test.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://fmwww.bc.edu/RePEc/es2000/1363.pdf
    File Function: main text
    Download Restriction: no

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1363.

    as
    in new window

    Length:
    Date of creation: 01 Aug 2000
    Date of revision:
    Handle: RePEc:ecm:wc2000:1363
    Contact details of provider: Phone: 1 212 998 3820
    Fax: 1 212 995 4487
    Web page: http://www.econometricsociety.org/pastmeetings.asp
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Luginbuhl, Rob & de Vos, Aart, 1999. "Bayesian Analysis of an Unobserved-Component Time Series Model of GDP with Markov-Switching and Time-Varying Growths," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 456-65, October.
    2. Kim, Myung Jig & Nelson, Charles R & Startz, Richard, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 515-28, May.
    3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
    4. So, Mike K P & Li, W K, 1999. "Bayesian Unit-Root Testing in Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 491-96, October.
    5. Berg, Lennart & Lyhagen, Johan, 1996. "Short and Long Run Dependence in Swedish Stock Returns," Working Paper Series 1996:19, Uppsala University, Department of Economics.
    6. Malliaropulos, Dimitrios & Priestley, Richard, 1999. "Mean reversion in Southeast Asian stock markets," Journal of Empirical Finance, Elsevier, vol. 6(4), pages 355-384, October.
    7. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    8. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
    9. Billio, M. & Monfort, A. & Robert, C. P., 1999. "Bayesian estimation of switching ARMA models," Journal of Econometrics, Elsevier, vol. 93(2), pages 229-255, December.
    10. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
    11. Kim, Chang-Jin & Nelson, Charles R. & Startz, Richard, 1998. "Testing for mean reversion in heteroskedastic data based on Gibbs-sampling-augmented randomization1," Journal of Empirical Finance, Elsevier, vol. 5(2), pages 131-154, June.
    12. Kim, Chang-Jin & Nelson, Charles R., 1998. "Testing for mean reversion in heteroskedastic data II: Autoregression tests based on Gibbs-sampling-augmented randomization1," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 385-396, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1363. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.