Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2000:8: A Bayesian Inference Approach to Testing Mean Reversion in the Swedish Stock Market

Andreas Graflund ()
Additional contact information
Andreas Graflund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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 stock market.

Keywords: Market efficency; variance ratio; Gibbs sampling; hidden markov Chains

JEL-codes: C11; C15; G10

21 pages, First version: October 3, 2000. Revised: January 30, 2002. Earlier revisions: November 9, 2000.

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