Testing for the Efficient Market Hypothesis in Stock Prices: International Evidence From Nonlinear Heterogeneous Panels

Abstract

Using international data, this paper explores whether the efficient market hypothesis for real stock prices is supported for different panels. The stationarity of a real stock price has important implications for modeling and forecasting financial activities. On a global scale, we implement the recently developed nonlinear heterogeneous panel unit root test, which allows us to account for possible nonlinearity and cross-section dependence and to identify how many and which countries of the panel contain a unit root. The primary conclusion is that the stationarity of real stock prices varies between regions and levels of economic development. Overall, our empirical results illustrate that real stock prices in these countries are a mixture of stationary (integrated of order zero) and nonstationary (integrated of order one) processes.

Mean reversion in Asia-Pacific stock prices: New evidence from quantile unit root tests

“…From an empirical perspective, the basic question posed by the EMH is one that, at least in principle, should be relatively easy to answer. Yet the EMH continues to receive considerable attention (see, for example, Narayan and Smyth (2005), Lean and Smyth (2007), Lim et al (2008), Lee et al (2010), Lee et al (2014), Shen and Holmes (2014a), Wang et al (2015), among others).…”

“…Empirical work on this topic argued that the behavior of stock prices is driven by nonlinearities that can be attributed to institutional constraints, market frictions and transaction costs. Relevant examples include Lim and Liew (2007), Chen and Kim (2011), Lee at al. (2014), and Shen and Holmes (2014b), though the evidence is still mixed at best.…”

The Response of the Stock Market to the Announcement of Global Pandemic

“…As the barometer of economic performance as well as the most sensitive index toward external shocks, investigating the impact of the current pandemic on the stock market has become a great deal of interest for policymakers, investors, and academic researchers. Although the stock market response to the worldwide epidemic/pandemic has been identified by a number of studies (see Chen, Jang, and Kim 2007;Chen et al 2009Chen et al , 2018Lee, Tsong, and Lee 2014;Ichev and Marinč 2018, etc. ), according to Baker et al (2020), no infectious disease has led to such huge swings in the U.S. stock market according to the number of trading days with jumps measured by Baker et al (2019) since 1900.…”

Industry co-movement and cross-listing: Do home country factors matter?

“…2 Copulas help to extract the dependence structures from the joint distribution function of a set of random variables and to isolate such a dependence structure from univariate marginal behavior. 3 The efficient market hypothesis suggests that in the absence of external shocks prices will converge to a steady-state path that is completely determined by fundamentals, and there are no opportunities for consistent speculative profits (Gaunersdorfer, 2000;Lee et al, 2014). Under perfect market integration, the pricing of a cross-listing should be mainly driven by fundamental information (Chen et al, 2009), signifying that, under the fundamental view, ADR industry co-movement should be integrated with the industry index of the home country.…”