Mean-Reverting Tendency in Stock Returns

Gourishankar S Hiremath ()
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Gourishankar S Hiremath: Department of Humanities and Social Science, IIT Kharagpur

Chapter Chapter 4 in Indian Stock Market, 2014, pp 59-83 from Springer

Abstract: Abstract This chapter re-examines the issue of mean-reversion in Indian stock market. Unlike earlier studies, the present one carries out multiple structural breaks tests and uses new and disaggregated data from June 1997 to March 2010. The study finds significant structural breaks in the returns series of all selected indices and thus provides evidence of trend stationary process in the Indian stock returns. The significant structural breaks that are endogenously searched 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, sub-prime crisis and global meltdown. The evidence of structural breaks and mean-reverting tendency indicates the possibility of prediction of returns and thus implies that efficient market hypothesis (EMH) does not hold in Indian context. The study finds that small indices with less liquidity and lower market capitalization are more vulnerable to shocks particularly external events rather than the high liquid and Large cap indices. Further, the sub-sample analysis shows that there was increasing nonrandom walk behavior in stock returns during the structural breaks periods. The results call for appropriate policies and regulatory measures particularly related to external events to improve the efficiency of the market.

Keywords: Mean reversion; Random walk; Market efficiency; Unit root; Structural breaks; Lagrange Multiplier; Trend stationary; External shocks; FIIs (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:spbchp:978-81-322-1590-5_4

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DOI: 10.1007/978-81-322-1590-5_4

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