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Stationary Components in Stock Prices: An Exact Pointwise Most Powerful Invariant Test

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  • Shively, Philip A

Abstract

This article develops an exact small-sample, pointwise most powerful invariant test to determine whether stock prices contain a stationary and therefore predictable component. This test generates consistent evidence that stock prices contain a hump-shaped, slowly trend-reverting stationary component over all sample periods tested, including and excluding the high return variance years of the 1930s. The empirical evidence in this article addresses three prominent puzzles in this literature--the negative and positive autocorrelations found in stock returns, the role of the 1930s, and the very low reported power of previous statistical tests that find a stationary component.

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  • Shively, Philip A, 2000. "Stationary Components in Stock Prices: An Exact Pointwise Most Powerful Invariant Test," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 489-496, October.
  • Handle: RePEc:bes:jnlbes:v:18:y:2000:i:4:p:489-96
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    Cited by:

    1. Ai Deng, 2014. "Understanding Spurious Regression in Financial Economics," Journal of Financial Econometrics, Oxford University Press, vol. 12(1), pages 122-150.
    2. Shively, Philip A., 2007. "Asymmetric temporary and permanent stock-price innovations," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 120-130, January.

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