A GARCH model for testing market efficiency

Paresh Kumar Narayan; Ruipeng Liu; Joakim Westerlund

doi:10.1016/j.intfin.2015.12.008

A GARCH model for testing market efficiency

Paresh Kumar Narayan, Ruipeng Liu, Joakim Westerlund

Research output: Contribution to journal › Article › Research › peer-review

69 Citations (Scopus)

Abstract

In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40% of the stocks, and only in four out of the nine sectors the null is rejected for over 50% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.

Original language	English
Pages (from-to)	121-138
Number of pages	18
Journal	Journal of International Financial Markets, Institutions and Money
Volume	41
DOIs	https://doi.org/10.1016/j.intfin.2015.12.008
Publication status	Published - Mar 2016
Externally published	Yes

Keywords

Efficient market hypothesis
GARCH
Stock price
Structural break
Unit root

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10.1016/j.intfin.2015.12.008

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abstract = "In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40\% of the stocks, and only in four out of the nine sectors the null is rejected for over 50\% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.",

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AU - Liu, Ruipeng

AU - Westerlund, Joakim

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AB - In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40% of the stocks, and only in four out of the nine sectors the null is rejected for over 50% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.

KW - Efficient market hypothesis

KW - GARCH

KW - Stock price

KW - Structural break

KW - Unit root

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JO - Journal of International Financial Markets, Institutions and Money

JF - Journal of International Financial Markets, Institutions and Money

ER -

A GARCH model for testing market efficiency

Abstract

Keywords

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