Are OECD stock prices characterized by a random walk? Evidence from sequential trend break and panel data models

Abstract

This paper examines whether stock prices for a sample of 22 OECD countries can be best represented as mean reversion or random walk processes. A sequential trend break test proposed by Zivot and Andrews is implemented, which has the advantage that it can take account of a structural break in the series, as well as panel data unit root tests proposed by Im et al., which exploits the extra power in the panel properties of the data. Results provide strong support for the random walk hypothesis.

Notes

Im et al. (2003) assume that ε_it  = θ_t  + ν_it where θ_t is a time-specific common effect which indicates the degree of dependence across countries and ν_it are i.i.d. idiosyncratic random effects. While cross-sectional de-meaning will introduce dependence across the de-meaned error terms, the tests will remain asymptotically valid provided that the ν_it are rendered uncorrelated.