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

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  • Graflund, Andreas

    (Department of Economics, Lund University)

Abstract

In this paper we use a Bayesian approach to test for mean reversion in the Swedish stock market on monthly data 1918-1998. By simply account for the heteroscedasticty of the data with a two state hidden Markov model of normal distributions and taking estimation bias into account via Gibbs sampling we can find no support of mean reversion. This is a contradiction to previous result from Sweden. Our findings suggest that 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 of randomness is in line with recent evidence for the U.S stock market.

Suggested Citation

  • Graflund, Andreas, 2000. "A Bayesian Inference Approach to Testing Mean Reversion in the Swedish Stock Market," Working Papers 2000:8, Lund University, Department of Economics, revised 30 Jan 2002.
    • Handle: RePEc:hhs:lunewp:2000_008
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    File URL: http://project.nek.lu.se/publications/workpap/Papers/WP00_8.pdf
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    References listed on IDEAS

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    8. 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.
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    Cited by:

    1. Bhar, Ramaprasad & Hamori, Shigeyuki, 2004. "Empirical characteristics of the permanent and transitory components of stock return: analysis in a Markov switching heteroscedasticity framework," Economics Letters, Elsevier, vol. 82(2), pages 157-165, February.
    2. Graflund, Andreas, 2001. "Are the Nordic Stock Markets Mean Reverting?," Working Papers 2001:15, Lund University, Department of Economics.

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    More about this item

    Keywords

    Market efficency; variance ratio; Gibbs sampling; hidden markov Chains;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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