TESTING MEAN REVERSION OF STOCK PRICES IN OECD COUNTRIES: EVIDENCE FROM FOURIER THRESHOLD UNIT ROOT TEST

Gökhan Konat; Hüseyin İşlek

Article Details

TESTING MEAN REVERSION OF STOCK PRICES IN OECD COUNTRIES: EVIDENCE FROM FOURIER THRESHOLD UNIT ROOT TEST

Authors:

Gökhan Konat | Hüseyin İşlek

Publisher:

Marmara University

Main Topics:

İşletme

Journal:

Journal of Research in Business Vol.9 Issue 1, pp.1-17

Document Type:

Article

Publication Date:

6/2024

Document Language:

English

Document ID (Org No.):

2001320830

pISSN:

2630-6255

Keywords:

Abstract:

 Researchers focus on whether stock prices have a unit root, that is, whether they contain a random walk process. If stock prices have a stationary process, that is, if they return to the mean, the effects of shocks are temporary, and it is interpreted that they will return to the trend path over time. If stock prices have transitory shocks, it allows for the prediction of future movements based on past behavior in terms of investment. This study investigates whether stock prices revert to the mean and thus have a random walk process. For this purpose, the Fourier Threshold Unit Root FTUR test based on the test methodology of Caner and Hansen 2001 for the period January 1990January 2021 for 26 OECD countries is applied. The FTUR test takes into account both structural breaks and nonlinearities. The purpose of using Fourier functions to account for structural changes is that they are not affected by the number, location, or shape of breaks. Thus, the power of the test increases. According to the results of this test, stock prices in Austria, Canada, Germany, Italy, New Zealand, Spain, and the UK are linear. Therefore, Fourier Augmented Dickey-Fuller FADF unit root analysis was performed for these countries. The FTUR test was performed in other countries. According to the results of FTUR and FADF unit root tests, stock prices are found to contain unit roots in some countries except Italy. In some countries, stock prices have a partial unit root structure. In other words, the effects of shocks are permanent, and it is concluded that future returns cannot be predicted in these countries with the random walk process.

 Researchers focus on whether stock prices have a unit root, that is, whether they contain a random walk process. If stock prices have a stationary process, that is, if they return to the mean, the effects of shocks are temporary, and it is interpreted that they will return to the trend path over time. If stock prices have transitory shocks, it allows for the prediction of future movements based on past behavior in terms of investment. This study investigates whether stock prices revert to the mean and thus have a random walk process. For this purpose, the Fourier Threshold Unit Root FTUR test based on the test methodology of Caner and Hansen 2001 for the period January 1990January 2021 for 26 OECD countries is applied. The FTUR test takes into account both structural breaks and nonlinearities. The purpose of using Fourier functions to account for structural changes is that they are not affected by the number, location, or shape of breaks. Thus, the power of the test increases. According to the results of this test, stock prices in Austria, Canada, Germany, Italy, New Zealand, Spain, and the UK are linear. Therefore, Fourier Augmented Dickey-Fuller FADF unit root analysis was performed for these countries. The FTUR test was performed in other countries. According to the results of FTUR and FADF unit root tests, stock prices are found to contain unit roots in some countries except Italy. In some countries, stock prices have a partial unit root structure. In other words, the effects of shocks are permanent, and it is concluded that future returns cannot be predicted in these countries with the random walk process.

 Researchers focus on whether stock prices have a unit root, that is, whether they contain a random walk process. If stock prices have a stationary process, that is, if they return to the mean, the effects of shocks are temporary, and it is interpreted that they will return to the trend path over time. If stock prices have transitory shocks, it allows for the prediction of future movements based on past behavior in terms of investment. This study investigates whether stock prices revert to the mean and thus have a random walk process. For this purpose, the Fourier Threshold Unit Root FTUR test based on the test methodology of Caner and Hansen 2001 for the period January 1990January 2021 for 26 OECD countries is applied. The FTUR test takes into account both structural breaks and nonlinearities. The purpose of using Fourier functions to account for structural changes is that they are not affected by the number, location, or shape of breaks. Thus, the power of the test increases. According to the results of this test, stock prices in Austria, Canada, Germany, Italy, New Zealand, Spain, and the UK are linear. Therefore, Fourier Augmented Dickey-Fuller FADF unit root analysis was performed for these countries. The FTUR test was performed in other countries. According to the results of FTUR and FADF unit root tests, stock prices are found to contain unit roots in some countries except Italy. In some countries, stock prices have a partial unit root structure. In other words, the effects of shocks are permanent, and it is concluded that future returns cannot be predicted in these countries with the random walk process.

 Hisse senedi fiyatlarının birim köke sahip olup olmadığı yani rassal yürüyüş süreci içerip içermediği araştırmacıların odağı halindedir. Hisse senedi fiyatları durağan sürece sahip ise yani ortalamaya geri dönüyorsa şokların etkileri geçicidir ve zamanla trend yoluna döneceği yorumu yapılmaktadır. Eğer hisse senedi fiyatları geçici şoklara sahip ise yatırım açısından geçmiş davranışlara bağlı olarak gelecekteki hareketlerin tahmin edilebilmesini olanak tanımaktadır. Bu çalışma, hisse senedi fiyatlarının ortalamaya dönüp dönmediğini ve dolaysıyla rassal yürüyüş sürecine sahip olup olmadığını araştırmaktadır. Bu amaçla, 26 OECD ülkesi için Ocak 1990-Ocak 2021 dönemi için Caner ve Hansen 2001 test metodolojisine dayanan Fourier Eşik Birim Kök FTUR testi ile ele alınan değişkenlerin sınamaları gerçekleştirilmiştir. FTUR testi, hem yapısal kırılmaları hem de doğrusal olmayan durumları dikkate almaktadır. Fourier fonksiyonlarının yapısal değişimleri hesaba katmak için kullanılmasındaki amaç kırılmaların sayısı, yeri ve şeklinden etkilenmemesidir. Böylece, testin gücü artmaktadır. Bu test sonuçlarına göre Avusturya, Kanada, Almanya, İtalya, Yeni Zelanda, İspanya ve İngilterede hisse senedi fiyatlarının doğrusal olduğu görülmektedir. Bu nedenle doğrusal olduğu gözlenen bu ülkeler için Fourier Augmented Dickey Fuller FADF birim kök analizi yapılmıştır. Diğer ülkeler için FTUR sınaması yapılmıştır. FTUR ve FADF birim kök testi sonuçlarına göre hisse senedi fiyatlarının İtalya dışında bazı ülkelerde birim kök içerdiği bulgusuna erişilmiştir. Bazı ülkelerde hisse senedi fiyatları kısmi bir birim kök yapısına sahiptir. Diğer bir deyişle, şokların etkileri kalıcıdır ve rassal yürüyüş süreci ile bu ülkelerde gelecekteki getirilerin tahmin edilemeyeceği sonucuna varılmaktadır.

Article Details

TESTING MEAN REVERSION OF STOCK PRICES IN OECD COUNTRIES: EVIDENCE FROM FOURIER THRESHOLD UNIT ROOT TEST

Authors:

Gökhan Konat | Hüseyin İşlek

Publisher:

Marmara University

Main Topics:

İşletme

Journal:

Journal of Research in Business Vol.9 Issue 1, pp.1-17

Document Type:

Article

Publication Date:

6/2024

Document Language:

English

Document ID (Org No.):

2001320830

pISSN:

2630-6255

Fourier Function

Stock Prices

mean reversion

smooth transition autoregressive (STAR) model

threshold unit root

Fourier functionHisse senedi fiyatları

ortalamaya dönüş

yumuşak geçişli otoregresif (STAR) model

eşik birim kök

Fourier fonksiyon

Issues

Article Details

Authors: Gökhan Konat | Hüseyin İşlek

Publisher: Marmara University

Main Topics: İşletme

Journal: Journal of Research in Business Vol.9 Issue 1, pp.1-17

Document Type: Article

Publication Date: 6/2024

Document Language: English

Document ID (Org No.): 2001320830

pISSN: 2630-6255

Issues

Authors:

Gökhan Konat | Hüseyin İşlek

Publisher:

Marmara University

Main Topics:

İşletme

Journal:

Journal of Research in Business Vol.9 Issue 1, pp.1-17

Document Type:

Article

Publication Date:

6/2024

Document Language:

English

Document ID (Org No.):

2001320830

pISSN:

2630-6255