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A GARCH model for testing market efficiency

Paresh Narayan (), Ruipeng Liu and Joakim Westerlund ()

Journal of International Financial Markets, Institutions and Money, 2016, vol. 41, issue C, 121-138

Abstract: In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40% of the stocks, and only in four out of the nine sectors the null is rejected for over 50% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.

Keywords: Efficient market hypothesis; GARCH; Unit root; Structural break; Stock price (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:41:y:2016:i:c:p:121-138

DOI: 10.1016/j.intfin.2015.12.008

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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