A GARCH Model for Testing Market Efficiency

Research output: Contribution to specialist publication or newspaperSpecialist publication article

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.

Details

Authors
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Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • Unit Root, Structural Break, Efficient Market Hypothesis, Stock Price, GARCH
Original languageEnglish
Pages121-138
Volume41
Specialist publication or newspaperJournal of International Financial Markets, Institutions, and Money
PublisherElsevier
Publication statusPublished - 2016
Publication categoryPopular science