Structural Breaks and Testing for the Random Walk Hypothesis in International Stock Prices

Chancharat, Surachai and Valadkhani, Abbas (2007): Structural Breaks and Testing for the Random Walk Hypothesis in International Stock Prices. Published in: Journal of the Korean Economy , Vol. 8, No. 1 (2007): pp. 21-38.

Abstract

This paper examines whether stock prices for 16 countries are trend stationary or follow a random walk process using the (Zivot and Andrews, 1992) and (Lumsdaine and Papell, 1997) tests and monthly data (1987:12-2005:12). With one structural break, the ZA test results provide evidence in favour of random walk hypothesis in 14 countries. However, when two endogenously-determined structural breaks are considered, this hypothesis was rejected for only five countries, suggesting a robust conclusion regarding the non-stationarity of stock prices world wide. In addition, the dates of structural break in most cases point to the Asian crisis in the period 1996-1998.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock market, random walk, structural break
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Balvers, Ronald, Yangru Wu and Erik Gilliland, "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, 55(2), April 2000, pp. 745-772.

Ben-David, Dan, Robin L. Lumsdaine and David H. Papell, "Unit Roots, Postwar Slowdowns and Long-Run Growth: Evidence from Two Structural Breaks," Empirical Economics, 28(2), April 2003, pp. 303-319.

Chaudhuri, Kausik and Yangru Wu, "Random Walk Versus Breaking Trend in Stock Prices: Evidence from Emerging Markets," Journal of Banking and Finance, 27(4), April 2003, pp. 575-592.

Dickey, David A. and Wayne A. Fuller, "Distribution of the Estimators for Autoregressive Time Series with a Unit Root," Journal of the American Statistical Association, 74(366), June 1979, pp. 427-431.

Fama, Eugene F., "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, 25(2), May 1970, pp. 383-417.

Fama, Eugene F. and Kenneth R. French, "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, 96(2), April 1988, pp. 246-273.

Gujarati, Damodar N., Basic Econometrics, 4th edn, Singapore: McGraw-Hill, 2003.

Hall, Alastair, "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business and Economic Statistics, 12(4), October 1994, pp. 461-470.

Kim, Myung Jig, Charles R. Nelson and Richard Startz, "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, 58(3), May 1991, pp. 515-528.

Lo, Andrew W. and A. Craig MacKinlay, "Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, 1(1), Spring 1988, pp. 41-66.

Lumsdaine, Robin L. and David H. Papell, "Multiple Trend Breaks and the Unit-Root Hypothesis," Review of Economics and Statistics, 79(2), May 1997, pp. 212-218.

Ma, Shiguang, The Efficiency of China's Stock Market, Burlington, VT: Ashgate, 2004.

Malliaropulos, Dimitrios and Richard Priestley, "Mean Reversion in Southeast Asian Stock Markets," Journal of Empirical Finance, 6(4), October 1999, pp. 355-384.

McQueen, Grant, "Long-Horizon Mean-Reverting Stock Prices Revisited," Journal of Financial and Quantitative Analysis, 27(1), March 1992, pp. 1-18.

Narayan, Paresh Kumar and Russell Smyth, "Are OECD Stock Prices Characterized by a Random Walk? Evidence from Sequential Trend Break and Panel Data Models," Applied Financial Economics, 15(8), May 2005, pp. 547-556.

Perron, Pierre, "The Great Crash, the Oil Price Shock and the Unit Root Hypothesis," Econometrica, 57(6), Novemver 1989, pp. 1361-1401.

Phillips, Peter C. B. and Pierre Perron, "Testing for a Unit Root in Time Series Regression," Biometrika, 75(2), June 1988, pp. 335-346.

Poterba, James M. and Lawrence H. Summers, "Mean Reversion in Stock Prices: Evidence and Implications," Journal of Financial Economics, 22(1), October 1988, pp. 27-59.

Urrutia, Jorge L., "Tests of Random Walk and Market Efficiency for Latin American Emerging Equity Markets," Journal of Financial Research, 18(3), Fall 1995, pp. 229-309.

Zhen, Zhu, "The Random Walk of Stock Prices: Evidence from a Panel of G7 Countries," Applied Economics Letters, 5(7), July 1998, pp. 411-413.

Zivot, Eric and Donald W. K. Andrews, "Further Evidence on the Great Crash, the Oil-Price Shock and the Unit-Root Hypothesis," Journal of Business and Economic Statistics, 10(3), July 1992, pp. 251-270.