TY - JOUR
T1 - Random walk versus breaking trend in stock prices
T2 - Evidence from emerging markets
AU - Chaudhuri, Kausik
AU - Wu, Yangru
N1 - Funding Information:
We would like to thank Yin-Wong Cheung, Jyotsna Jalan, Subhashis Gangopadhyay and three anonymous referees for helpful comments, and Stephanie Hughes for data assistance. Yangru Wu would like to gratefully acknowledge financial support from Rutgers University’s Research Council and the Faculty of Management. The usual disclaimer applies. Part of this work was completed while Yangru Wu was visiting the Hong Kong Institute for Monetary Research. He thanks the Institute for its hospitality. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Hong Kong Institute for Monetary Research, its Council of Advisors, or Board of Directors.
PY - 2003/4/1
Y1 - 2003/4/1
N2 - This paper investigates whether stock-price indexes of seventeen emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a test that can account for structural breaks in the underlying series and is more powerful than standard tests. We find that for fourteen countries, stock prices exhibit structural breaks. Furthermore, for ten countries, the null hypothesis of a random walk can be rejected at the one or 5% significance level. Our results indicate that ignoring structural breaks that arise from the liberalization of emerging markets can lead to incorrect inference that these indices are characterized by random walks, and are consistent with the points made by Bekaert et al. [J. Int. Money Finan. 21 (2002) 295]. Our findings hold true regardless of whether stock indexes are denominated in US dollar terms, in local currencies terms, or in real terms.
AB - This paper investigates whether stock-price indexes of seventeen emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a test that can account for structural breaks in the underlying series and is more powerful than standard tests. We find that for fourteen countries, stock prices exhibit structural breaks. Furthermore, for ten countries, the null hypothesis of a random walk can be rejected at the one or 5% significance level. Our results indicate that ignoring structural breaks that arise from the liberalization of emerging markets can lead to incorrect inference that these indices are characterized by random walks, and are consistent with the points made by Bekaert et al. [J. Int. Money Finan. 21 (2002) 295]. Our findings hold true regardless of whether stock indexes are denominated in US dollar terms, in local currencies terms, or in real terms.
KW - Emerging markets
KW - Market liberalization
KW - Random walk
KW - Structural breaks
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U2 - 10.1016/S0378-4266(01)00252-7
DO - 10.1016/S0378-4266(01)00252-7
M3 - Article
AN - SCOPUS:0037375007
SN - 0378-4266
VL - 27
SP - 575
EP - 592
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 4
ER -