Testing asymmetry in mean reversion based on high and low prices: Evidence from BRICS countries

Abstract

Shaik and Maheswaran (2018) proposed the Expected Lifetime Range (ELR) ratio based on high minus low price (range) series to detect mean reversion. This paper extends this test statistic and proposes a set of test statistics—Expected Lifetime Surplus (ELSp) and Expected Lifetime Shortfall (ELSf) ratios—which are based on high and low price series respectively. These test statistics help in precisely detecting whether the source of market inefficiency is the high or the low price series. The paper empirically tests the three test statistics on the BRICS stock market indices. The sample period is divided into pre and post subprime crisis data sets. It is found that the BRICS stock market indices show mean reversion from 2001 to 2018. While in the pre subprime crisis period the indices followed random walk, after the subprime crisis the BRICS stock markets show mean reversion behavior. The source of this mean reversion are the high prices which have become more predictable after the subprime crisis.