Working Papers, Department of Economics, Lund University
A Bayesian Inference Approach to Testing Mean Reversion in the Swedish Stock Market
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 heteroscedasticty of the data with a two state hidden
Markov model of normal distributions and taking estimation bias into
account via Gibbs sampling we can find no support of mean reversion. This
is a contradiction to previous result from Sweden. Our findings suggest
that the Swedish stock market can be characterized by two regimes, a
tranquil and a volatile, and within the regimes the stock market is random.
This finding of randomness is in line with recent evidence for the U.S
Keywords: Market efficency; variance ratio; Gibbs sampling; hidden markov Chains; (follow links to similar papers)
JEL-Codes: C11; C15; G10; (follow links to similar papers)
21 pages, October 3, 2000, Revised January 30, 2002
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