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Mean reversion in stock prices: new evidence from panel unit root tests

Author

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  • Paresh Kumar Narayan
  • Seema Narayan

Abstract

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 Shint‐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.

Suggested Citation

  • Paresh Kumar Narayan & Seema Narayan, 2007. "Mean reversion in stock prices: new evidence from panel unit root tests," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 24(3), pages 233-244, August.
    • Handle: RePEc:eme:sefpps:v:24:y:2007:i:3:p:233-244
    DOI: 10.1108/10867370710817419
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    Citations

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    Cited by:

    1. Durusu-Ciftci, Dilek & Ispir, M. Serdar & Kok, Dundar, 2019. "Do stock markets follow a random walk? New evidence for an old question," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 165-175.
    2. Xin Shen & Mark J. Holmes, 2014. "Do Asia-Pacific stock prices follow a random walk? A regime-switching perspective," Applied Economics Letters, Taylor & Francis Journals, vol. 21(3), pages 189-195, February.
    3. Tülin Anlas & Cengiz Toraman, 2016. "Analysing the Efficiency of the Turkish Stock Market with Multiple Structural Breaks," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(12), pages 721-740, December.
    4. repec:ebl:ecbull:v:30:y:2010:i:1:p:274-281 is not listed on IDEAS
    5. Erdas Mehmet Levent, 2019. "Validity of Weak-Form Market Efficiency in Central and Eastern European Countries (CEECs): Evidence from Linear and Nonlinear Unit Root Tests," Review of Economic Perspectives, Sciendo, vol. 19(4), pages 399-428, December.
    6. Kauko, Karlo, 2010. "The feasibility of through-the-cycle ratings," Bank of Finland Research Discussion Papers 14/2010, Bank of Finland.
    7. Khurshid Kiani, 2010. "Predictable Signals in Excess Returns: Evidence from Non-Gaussian State Space Models," Economics Bulletin, AccessEcon, vol. 30(2), pages 1217-1232.
    8. Alexakis, Christos, 2010. "Long-run relations among equity indices under different market conditions: Implications on the implementation of statistical arbitrage strategies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 389-403, October.
    9. Ivanov, Ivan & Kabaivanov, Stanimir & Bogdanova, Boryana, 2016. "Stock market recovery from the 2008 financial crisis: The differences across Europe," Research in International Business and Finance, Elsevier, vol. 37(C), pages 360-374.
    10. Nathaniel Gbenro & Richard Kouamé Moussa, 2019. "Asymmetric Mean Reversion in Low Liquid Markets: Evidence from BRVM," Post-Print hal-02059799, HAL.
    11. Nathaniel Gbenro & Richard Kouamé Moussa, 2019. "Asymmetric Mean Reversion in Low Liquid Markets: Evidence from BRVM," JRFM, MDPI, vol. 12(1), pages 1-19, March.
    12. Nartea, Gilbert V. & Valera, Harold Glenn A. & Valera, Maria Luisa G., 2021. "Mean reversion in Asia-Pacific stock prices: New evidence from quantile unit root tests," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 214-230.
    13. Yoichi Matsubayashi & Takao Fujii, 2012. "Substitutability of Savings by Sectors: OECD Experiences," Discussion Papers 1215, Graduate School of Economics, Kobe University.
    14. Lee, Chien-Chiang & Lee, Jun-De & Lee, Chi-Chuan, 2010. "Stock prices and the efficient market hypothesis: Evidence from a panel stationary test with structural breaks," Japan and the World Economy, Elsevier, vol. 22(1), pages 49-58, January.
    15. Emmanouil Mavrakis & Christos Alexakis, 2018. "Statistical Arbitrage Strategies under Different Market Conditions: The Case of the Greek Banking Sector," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2), pages 159-185, August.
    16. Siow-hooi Tan & Muzafar-shah Habibullah & Roy-wye-leong Khong, 2010. "Non-linear unit root properties of stock prices: Evidence from India, Pakistan and Sri Lanka," Economics Bulletin, AccessEcon, vol. 30(1), pages 274-281.
    17. Mohammed S. Khaled & Stephen P. Keef, 2014. "On the dynamics of international stock market efficiency," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-11, December.
    18. repec:zbw:bofrdp:2010_014 is not listed on IDEAS
    19. Yongmin Zhang & Shusheng Ding & Meryem Duygun, 2019. "Derivatives pricing with liquidity risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1471-1485, November.

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