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Nonlinear Mean Reversion across National Stock Markets: Evidence from Emerging Asian Markets

Chen, Shu-Ling and Kim, Hyeongwoo (2008): Nonlinear Mean Reversion across National Stock Markets: Evidence from Emerging Asian Markets.

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Abstract

This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price indices for Emerging Asian countries. It is well known that conventional linear unit root tests suffer from low power against the stationary nonlinear alternative. Implementing the nonlinear unit root tests proposed by Kapetanios, et al. (2003) and Cerrato, et al. (2009) for the relative stock prices of Emerging Asian markets, we find strong evidence of nonlinear mean reversion, whereas linear tests fail to reject the unit root null for most cases. We also report some evidence that stock markets in China and Taiwan are highly localized.

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