Random Walk versus Breaking Trend in Stock Prices: Evidence from Emerging Markets

Abstract This paper investigates whether stock-price indices of seventeen emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a test that can account for possible structural breaks in the underlying series and is considerably more powerful than standard tests for a random walk. We find that for fourteen countries, stock prices exhibit significant structural breaks in the sample. Furthermore, for ten countries, the null hypothesis of a random walk can be rejected at the 1or 5-percent significance level in favor of the alternative hypothesis that these indices follow mean-reverting processes. The results hold regardless of whether stock indices are denominated in U.S. dollar terms, in local currencies, or in real terms.This paper investigates whether stock-price indices of seventeen emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a test that can account for possible structural breaks in the underlying series and is considerably more powerful than standard tests for a random walk. We find that for fourteen countries, stock prices exhibit significant structural breaks in the sample. Furthermore, for ten countries, the null hypothesis of a random walk can be rejected at the 1or 5-percent significance level in favor of the alternative hypothesis that these indices follow mean-reverting processes. The results hold regardless of whether stock indices are denominated in U.S. dollar terms, in local currencies, or in real terms. JEL Codes: G15, G14, C22