TY - JOUR
T1 - Mean reversion in stock prices
T2 - new evidence from panel unit root tests
AU - Narayan, Paresh Kumar
AU - Narayan, Seema
N1 - Copyright:
Copyright 2016 Elsevier B.V., All rights reserved.
PY - 2007/8/7
Y1 - 2007/8/7
N2 - Purpose There are several studies that investigate evidence for mean reversion in stock prices. However, there is no consensus as to whether stock prices are mean reverting or random walk (unit root) processes. The goal of this paper is to re-examine mean reversion in stock prices. Design/methodology/approach The authors use five different panel unit root tests, namely the Im, Pesaran and Shin t-bar test statistic, the Levin and Lin test, the Im, Lee, and Tieslau Lagrangian multiplier test statistic, the seemingly unrelated regression test, and the multivariate augmented Dickey Fuller test advocated by Taylor and Sarno. Findings The main finding is that there is no mean reversion of stock prices, consistent with the efficient market hypothesis. Research limitations/implications One issue not considered by this study is the role of structural breaks. It may be the case that the efficient market hypothesis is contingent on structural breaks in stock prices. Future studies should model structural breaks. Practical implications The findings have implications for econometric modelling, in particular forecasting. Originality/value This paper adds to the scarce literature on the mean reverting property of stock prices based on panel data: thus, it should be useful for researchers.
AB - Purpose There are several studies that investigate evidence for mean reversion in stock prices. However, there is no consensus as to whether stock prices are mean reverting or random walk (unit root) processes. The goal of this paper is to re-examine mean reversion in stock prices. Design/methodology/approach The authors use five different panel unit root tests, namely the Im, Pesaran and Shin t-bar test statistic, the Levin and Lin test, the Im, Lee, and Tieslau Lagrangian multiplier test statistic, the seemingly unrelated regression test, and the multivariate augmented Dickey Fuller test advocated by Taylor and Sarno. Findings The main finding is that there is no mean reversion of stock prices, consistent with the efficient market hypothesis. Research limitations/implications One issue not considered by this study is the role of structural breaks. It may be the case that the efficient market hypothesis is contingent on structural breaks in stock prices. Future studies should model structural breaks. Practical implications The findings have implications for econometric modelling, in particular forecasting. Originality/value This paper adds to the scarce literature on the mean reverting property of stock prices based on panel data: thus, it should be useful for researchers.
KW - Financial forecasting
KW - Stock markets
KW - Stock prices
KW - Stock returns
UR - http://www.scopus.com/inward/record.url?scp=84993064650&partnerID=8YFLogxK
U2 - 10.1108/10867370710817419
DO - 10.1108/10867370710817419
M3 - Article
AN - SCOPUS:84993064650
SN - 1086-7376
VL - 24
SP - 233
EP - 244
JO - Studies in Economics and Finance
JF - Studies in Economics and Finance
IS - 3
ER -