Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2001:15: Are the Nordic Stock Markets Mean Reverting?

Andreas Graflund ()
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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 test for mean reversion in the Nordic stock markets using monthly nominal data 1947-1998. By simply account for the heteroscedasticity of the data with a regime-switching model of normal distributions and taking estimation bias into account via a Bayesian approach we can find no support of mean reversion. This is a contradiction to some previous result from Denmark and Sweden. Our findings suggest that mixtures of two regimes can characterize the each stock market and within the regimes the stock market is random. This finding of randomness is in line with recent evidence in literature.

Keywords: market efficiency; variance ratio; Gibbs sampling; hidden Markov chains; MCMC

JEL-codes: C11; C15; G10

26 pages, August 30, 2001

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