Revisiting Mean Reversion in the Stock Prices of Nine Transition Countries: Threshold Unit Root Test
Guochen PAN, Sen-Sung CHEN, Tsangyao CHANG
Summary：
Whether or not stock prices are characterized by a unit root has important implications for the efficient market hypothesis which asserts that returns of a stock market are unpredictable from previous price changes. If stock prices are an I(0) stationary process, then any shock effect is temporary. Thus, shifting the stock price from one level to another will eventually return it to its equilibrium level. From an investment point of view, this ensures that one can forecast future movements in stock prices based on past behavior, and trading strategies can be developed so as to earn abnormal returns. However, if it is found that stock prices are non-stationary (or I(1) process) then shocks will have a permanent effect, implying that stock prices will attain a new equilibrium and future returns cannot be predicted based on historical movements in stock prices. This proposition was termed the weak-form efficient market hypothesis.
Though numerous studies have found evidence of a unit root in stock price series, the conventional unit root tests employed in these researches are widely criticized to have lower power when compared with near-unit-root but stationary alternatives. Here in this paper, we use the threshold autoregressive model and the test statistics suggested by Caner and Hansen (2001) to examine property of mean reversion in nine transition countries which are Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and the Russia. The main advantage of this procedure is that it allows one to simultaneously test for nonlinearities and nonstationarity. We found the transition countries to be an interesting sample to investigate stock market behavior since they had moved from centrally planned economies towards market driven economies recently and many investors give their gaze to these markets. The data set consists of weekly stock market indices for the nine transition countries during the 2000.10 to 2010.11 period.
The empirical results from our threshold unit root test indicate that the null hypothesis of I(1) unit root in stock prices can not be rejected for any of these transition countries, with the exception of Estonia and Latvia two countries. Our results highlight the weak-form efficient market hypothesis does hold in these transition stock markets, with the exception of the Estonia and Latvia two stock markets.
Keywords: Mean Reversion; Stock Prices; Transition Countries; Threshold Unit Test
（原文载于SSCI期刊《Romanian Journal of Economic Forecasting》, 2012(4)）
