Trend path and that asset returns are unpredictable based on historical observations. Random walk process implies that there is no tendency for the price level to return to a If the stock price follows a mean reverting process, thereĮxists a tendency for the price level to return to its trend path over time and investorsĬan forecast future returns by using information on past returns. Stock prices can be characterized as unit root (random walk) processes or as mean reverting Properties of stock prices, with particular attention being paid to investigate whether It is argued here that failure to take into account the breaking points may significantly reduce the power of traditional tests, and mistakenly, produce evidence in support of the random walk hypothesis.įinancial economists have shown considerable interest in the long-run time series The results are in sharp contrast to those obtained with the traditional tests where the possible breaks are not considered. Furthermore, the null hypothesis of a random walk can be rejected at 5% significance level in favor of the alternative hypothesis that the index follows the mean-reverting processes. It is observed that stock prices exhibit significant structural breaks in the sample. To this end, the authors employ the sequential test procedure developed by Zivot and Andrews1 (1992) to test for the random walk hypothesis, which allows for a one-time change in the constant and/or in the slope of the trend function of the underlying series. The use of unit root tests, in a conventional way, may not be an appropriate proposition, given the possible breaks in trends. Financial economists have shown considerable interest in the long-run time series properties of stock prices, with particular attention paid to investigate whether stock prices can be characterized as unit root (random walk) processes or mean reverting (trend stationary) processes. The objective of the study is to examine the recent pattern of stock market development in India within the framework of trend breaks. The uneven growth is reflected in the sharp breaks exhibited by the indicators. A perusal of the stock market development indicators in India reveals that it has witnessed a phenomenal but uneven growth under the New Economic Policy (NEP), operative since 1992.
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