Do stock returns in India exhibit a mean reverting tendency? Evidence from multiple structural breaks test

Hiremath, Gourishankar S and Bandi, Kamaiah (2010): Do stock returns in India exhibit a mean reverting tendency? Evidence from multiple structural breaks test. Published in: Banking and Finance Letters , Vol. 2, No. 4 (2010): pp. 371-390.

Abstract

This paper re-examines the issue of mean-reversion in Indian equity market. Unlike earlier studies, the present paper carries out multiple structural breaks test and uses new and disaggregated data set. The study found significant structural breaks in the returns series of all selected indices and thus provide evidence of mean-reverting tendency in the Indian stock returns. This implies violation of efficient market hypothesis in India. The endogenously searched significant structural breaks occurred in the years 2000, 2003, 2006, 2007 and 2008 for most of the indices indicating respectively rise in international oil prices, global recession, erratic fluctuations in exchange rates, and sub-prime crisis followed by global meltdown. The evidences of structural breaks and mean-reverting tendency indicate possibility to predict the future returns. Further, it is observed that small indices with less liquidity and lower market capitalization are more vulnerable to external events than the liquid indices. The results call for appropriate policy and regulatory measures particularly external shocks to improve the efficiency of the market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Multiple Structural Breaks, Mean Reversion; Random Walk,Efficient Market Hypothesis, Oil Price Shocks, Global Economic Crisis, Indian Stock Market, BSE, NSE Shocks; NSE; BSE.
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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