Do Asia-Pacific stock prices follow a random walk? A regime-switching perspective

Abstract

This article tests for stock market efficiency among 12 Asia-Pacific countries. A novel approach is applied where unit-root tests of real stock prices are embedded within a Markov regime-switching framework. Although standard univariate unit-root tests provide little support for stock price mean reversion, we find that each country is characterized by two stationary regimes with different speeds of adjustment. Further analysis suggests that the recent global financial crisis is associated with a shift in regimes, where the aftermath of the crisis is more likely associated with a faster speed of mean-reversion.

Keywords:

• stock prices
• mean reversion
• Markov switching ADF
• nonlinearity

JEL Classification:

• C1
• C5
• G1