A Bayesian Inference Approach to Testing Mean Reversion in the Swedish Stock Market
21 Pages Posted: 7 Dec 2000
Date Written: August 2000
Abstract
In this paper we use a Bayesian approach to test for mean reversion in the Swedish stock market on monthly data 1918-1998. By simply account for the heteroscedasticity of the data with a two-state hidden Markov model of normal distributions and taking estimation bias into account via Gibbs sampling we cannot find support of mean reversion. This is a contradiction to previous result from Sweden. We find that a tranquil and a volatile regime can characterize the Swedish stock market and within the regimes the stock market is random. This finding of randomness is in line with recent evidence for the U.S stock market.
Keywords: Market efficiency, variance ratio, Gibbs sampling, hidden Markov chains, MCMC
JEL Classification: G10 C11 C15
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Nicholas Barberis, Andrei Shleifer, ...
-
A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
By Harrison G. Hong and Jeremy C. Stein
-
By Louis K.c. Chan, Narasimhan Jegadeesh, ...
-
Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
By Harrison G. Hong, Terence Lim, ...
-
Profitability of Momentum Strategies: An Evaluation of Alternative Explanations
-
Profitability of Momentum Strategies: an Evaluation of Alternative Explanations
-
When are Contrarian Profits Due to Stock Market Overreaction?
By Andrew W. Lo and A. Craig Mackinlay