Fractional integration and mean reversion in stock prices |
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| Institution: | 1. Centre for Monetary and Financial Economics, South Bank University, 103 Borough Road, London SE1 0AA, UK;2. Institut für Statistik und Ökonometrie, Humboldt Universität zu Berlin, Germany;1. College of Mathematics and Software Science, Sichuan Normal University, Chengdu 610068, China;2. College of Mathematics and Statistics, Chongqing University, Chongqing 401331, China;3. College of Computer and Information Science, Fujian Agriculture and Forestry University, Fuzhou 350002, China;4. College of Mathematics, Sichuan University, Chengdu 610065, China;5. School of Aeronautics and Astronautics, Sichuan University, Chengdu 610065, China;1. Department of Applied Mathematics with Oceanology and Computer Programming, Vidyasagar University, Midnapore, West Bengal 721102, India;2. Department of Mathematics, Sidho Kanho Birsha University, Purulia, West Bengal 723101, India;1. Division of Image Processing, Dept. of Radiology, Leiden University Medical Center, Leiden, The Netherlands;2. Dept. of Radiology, University Medical Center Rotterdam, Rotterdam, The Netherlands;3. Biomedical Instrument Institute, School of Biomedical Engineering, Shanghai Jiao Tong University, Shanghai, China;4. Dept. of Cardiology, Leiden University Medical Center, Leiden, The Netherlands;5. Cardiovascular Center, OLV Clinic, Aalst, Belgium;6. Medis Medical Imaging System, b.v., Leiden, The Netherlands;1. UNE Centre for Local Government at the University of New England, Armidale, Australia;2. Fakulti Pengurusan Perniagaan at the Universiti Teknologi MARA in Kota Samarahan, Sarawak, Malaysia |
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| Abstract: | The Efficient Market Hypothesis (EMH) is frequently tested by measuring the degree of mean reversion in stock prices, since highly predictable changes might indicate that investors are not fully rational. Existing studies often rely on statistical tests which impose too restrictive assumptions on the time series behavior of the series of interest, and have very low power. This paper uses a test for unit roots and other nonstationary (and stationary) hypotheses—recently developed by Robinson (1994)—which allows for fractional alternatives and outperforms rival statistics. Its application to U.S. real stock returns suggests that there is no permanent component in stock prices, since the series examined is close to being I(0). The key question then becomes whether there exists an autocorrelated structure, which would imply that the series is perfectly predictable, and hence that the market might not be efficient. |
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