Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study

Ronald Balvers and Yangru Wu ()

No 112002, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Using a panel data set for 18 stock countries, this paper finds fairly strong integration among national equity markets. A country's stock index price can be decomposed into a common trend component and a stationary country-specific component. Results show that the 18 country indexes reverse to the world trend with a speed of 18% per year, and that the Hong Kong market converges to other markets with a speed of 22% per year or a half life of around three years. The two components can be separately estimated using maximum likelihood. The country-specific component displays substantial variability and is found to have both mean reversion over the long horizon and momentum over the short horizon. A simple parametric trading strategy exploiting simultaneously mean reversion and momentum effects produces an excess return of 16.7% per year, which exceeds those of strategies based on momentum or mean reversion separately. The excess return is statistically significant, and cannot be explained by systematic risk factors or by transaction costs. The results seem to support the behavioralist overreaction view vis-ˆj-vis an efficient markets view.

Pages: 29 pages
Date: 2002-05
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.hkimr.org/uploads/publication/298/ub_full_0_2_37_wp200211_text.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.hkimr.org/uploads/publication/298/ub_full_0_2_37_wp200211_text.pdf [301 Moved Permanently]--> http://www.aof.org.hk/research/HKIMR/uploads/publication/298/ub_full_0_2_37_wp200211_text.pdf [301 Moved Permanently]--> https://www.aof.org.hk/research/HKIMR/uploads/publication/298/ub_full_0_2_37_wp200211_text.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hkm:wpaper:112002

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().