Mean Reversions in Major Developed Stock Markets: Recent Evidence from Unit Root, Spectral and Abnormal Return Studies

James Nguyen, Wei-Xuan Li and Clara Chia-Sheng Chen
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James Nguyen: College of Business, Engineering and Technology, Texas A&M University Texarkana, Texarkana, TX 75503, USA
Wei-Xuan Li: School of Business, Stockton University, Galloway, NJ 08205, USA
Clara Chia-Sheng Chen: School of Business, Madonna University, Livonia, MI 48150, USA

JRFM, 2022, vol. 15, issue 4, 1-20

Abstract: We revisited the issue of return predictability in three major developed markets (USA, UK and Japan) using a unique dataset from the Wharton Research Data Services database and a comprehensive set of traditional and recent statistical methods. We specifically employed a variety of traditional linear and nonlinear tests, latest multiple-break unit root tests and spectral analysis to test the efficient market hypothesis. Our results show that these stock markets generally are inefficient. We further explored whether the departure from market efficiency can be used to generate profitable trades and found that abnormal returns exist in all three markets. We found evidence of abnormal returns associated with the break dates identified in the models which are correlated with major historical events around the world. Our findings have important implications for investors and policymakers.

Keywords: efficient market hypothesis; unit root; spectral analysis; abnormal returns (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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