Are Stock Returns Time Reversible? International Evidence from Frequency Domain Tests

Abstract

This paper first introduces the trispectrum-based time reversibility test to complement its bispectrum counterpart introduced earlier in extant literature. Using these frequency domain tests, we then examine whether the returns series of major stock market indices in 48 countries are time reversible. The results consistently show that time irreversibility is the rule rather than the exception for stock market indices. Further investigation on the sources of time irreversibility by applying the bispectrum-based Gaussianity and linearity tests on the original returns series reveals that the rejections in most cases are due to nonlinearity. Implications of the findings are discussed in the paper.

Keywords: Time reversibility, Bispectrum, Trispectrum, Stock returns

JEL Classification: C12, G15