Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study

HKIMR Working Paper No. 11/2002

29 Pages Posted: 25 Aug 2007

See all articles by Ronald J. Balvers

Ronald J. Balvers

McMaster University - Michael G. DeGroote School of Business

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: May 2002

Abstract

Using a panel data set for 18 stock countries, this paper finds fairly strong integration among national equity markets. A country's stock index price can be decomposed into a common trend component and a stationary country-specific component. Results show that the 18 country indexes reverse to the world trend with a speed of 18% per year, and that the Hong Kong market converges to other markets with a speed of 22% per year or a half life of around three years. The two components can be separately estimated using maximum likelihood. The country-specific component displays substantial variability and is found to have both mean reversion over the long horizon and momentum over the short horizon. A simple parametric trading strategy exploiting simultaneously mean reversion and momentum effects produces an excess return of 16.7% per year, which exceeds those of strategies based on momentum or mean reversion separately. The excess return is statistically significant, and cannot be explained by systematic risk factors or by transaction costs. The results seem to support the behavioralist overreaction view vis-à-vis an efficient markets view.

Suggested Citation

Balvers, Ronald J. and Wu, Yangru, Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study (May 2002). HKIMR Working Paper No. 11/2002, Available at SSRN: https://ssrn.com/abstract=1009355 or http://dx.doi.org/10.2139/ssrn.1009355

Ronald J. Balvers (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 x23969 (Phone)

HOME PAGE: http://profs.degroote.mcmaster.ca/business/balvers

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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