An examination of mean-reverting behavior of stock prices in Pacific-Basin stock markets

Abstract

A random walk process has been widely accepted as the price behavior In various took markets. This paper employs the varianne ratio test to re-examine the random walk hypothesis for five Asian Stock markets, namely Hong Kong, Japan, Singapore, Korea, and Taiwan. Both daily and weekly data are examined for the period of Jamiary 1982 through June 1987. addition to Lo and MacKinlay [1988] heteroskedasticity robust test statistic, the bootstrap resampling technique, which is free of distribution assumptions, is used to provide a significance rest The mull hypothesis of randomness is rejected for both daily and weekly market Indexes of all five Asian Countries. The pattern of variance ratios suggests that all market index returns are positively autogartelated except for Japan's, which exhibits a mean- reverting behavior Furthermore, weekly returns produce a stronger autocorrelation than do daily returns.