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

Narayan, Paresh and Narayan, Seema 2007, Mean reversion in stock prices: new evidence from panel unit root tests, Studies in economics and finance, vol. 24, no. 3, pp. 233-244.

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Title Mean reversion in stock prices: new evidence from panel unit root tests
Author(s) Narayan, Paresh
Narayan, Seema
Journal name Studies in economics and finance
Volume number 24
Issue number 3
Start page 233
End page 244
Publisher Emerald Group Publishing
Place of publication Bingley, England
Publication date 2007
ISSN 1086-7376
Keyword(s) financial forecasting
stock markets
stock prices
stock returns
Summary 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.

Language eng
Field of Research 140304 Panel Data Analysis
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2007, Emerald Group Publishing
Persistent URL http://hdl.handle.net/10536/DRO/DU:30007767

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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