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A GARCH Model for Testing Market Efficiency

Westerlund, Joakim LU ; Narayan, Paresh and Liu, Puipeng (2016) In Journal of International Financial Markets, Institutions, and Money 41. p.121-138
Abstract
In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40% of the stocks, and only in four out of the nine sectors the null is rejected for over 50% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.
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author
organization
publishing date
type
Contribution to specialist publication or newspaper
publication status
published
subject
keywords
Unit Root, Structural Break, Efficient Market Hypothesis, Stock Price, GARCH
categories
Popular Science
in
Journal of International Financial Markets, Institutions, and Money
volume
41
pages
121 - 138
publisher
North-Holland
external identifiers
  • scopus:84960494296
  • wos:000373611400008
ISSN
1042-4431
DOI
10.1016/j.intfin.2015.12.008
language
English
LU publication?
yes
id
06f7dd3e-5fe3-419a-bfab-5855236ecb99 (old id 8516060)
date added to LUP
2016-01-11 10:21:14
date last changed
2017-09-03 03:33:20
@misc{06f7dd3e-5fe3-419a-bfab-5855236ecb99,
  abstract     = {In this paper we propose a generalised autoregressive conditional heteroskedasticity (GARCH) model-based test for a unit root. The model allows for two endogenous structural breaks. We test for unit roots in 156 US stocks listed on the NYSE over the period 1980 to 2007. We find that the unit root null hypothesis is rejected in 40% of the stocks, and only in four out of the nine sectors the null is rejected for over 50% of stocks. We conclude with an economic significance analysis, showing that mostly stocks with mean reverting prices tend to outperform stocks with non-stationary prices.},
  author       = {Westerlund, Joakim and Narayan, Paresh and Liu, Puipeng},
  issn         = {1042-4431},
  keyword      = {Unit Root,Structural Break,Efficient Market Hypothesis,Stock Price,GARCH},
  language     = {eng},
  pages        = {121--138},
  publisher    = {North-Holland},
  series       = {Journal of International Financial Markets, Institutions, and Money},
  title        = {A GARCH Model for Testing Market Efficiency},
  url          = {http://dx.doi.org/10.1016/j.intfin.2015.12.008},
  volume       = {41},
  year         = {2016},
}