Stationary Components in Stock Prices: An Exact Pointwise Most Powerful Invariant Test

Philip A Shively

Journal of Business & Economic Statistics, 2000, vol. 18, issue 4, 489-96

Abstract: This article develops an exact small-sample, pointwise most powerful invariant test to determine whether stock prices contain a stationary and therefore predictable component. This test generates consistent evidence that stock prices contain a hump-shaped, slowly trend-reverting stationary component over all sample periods tested, including and excluding the high return variance years of the 1930s. The empirical evidence in this article addresses three prominent puzzles in this literature--the negative and positive autocorrelations found in stock returns, the role of the 1930s, and the very low reported power of previous statistical tests that find a stationary component.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:bes:jnlbes:v:18:y:2000:i:4:p:489-96

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