The Study of Mean reversion in Tehran Stock Exchange with unit root test

Subject Areas : Journal of Investment Knowledge

Hossein Karbasi Yazdi ¹ , Yadollah Noorifard ² , Hassan Chenari Bouket ³

1 - Assistant Professor, Department of Accounting, Islamic Azad University of South Tehran Branch
2 - Assistant Professor, Department of Accounting, Islamic Azad University of South Tehran Branch
3 - M.Sc in Accounting, Department of Accounting, Islamic Azad University of South Tehran Branch (Corresponding Author)

Received: 2012-08-15 Accepted : 2012-12-18 Published : 2012-12-18

Keywords: efficient market, Mean reversion price, Random Walk,

Abstract :

Financial Scientists have always been eager to distinguish between whether the price series could be random walk (unit root) or mean reversion processes. Random walk means that accruing shocks to the stock price have permanent impacts and prices don't revert to their previous trend path. In efficient market, the stock  return couldn't be predicted using previous price variation. However, efficient market hypothesis is under question because the researchers have provided evidences that reveal some anomalies in stock markets. Mean reversion stock price is one of these anomalies. The purpose of this research is the study of  mean reversion in the period 1380-1389. In line with this research, using unit root test (Dickey Fuller generalized), the phenomenon of mean reversion in the total stock price index, stock price and cash returns index, and the index's top fifty companies were examined. The results of the study indicate that continuous changes in the ‌total stock price index and the index of the top fifty companies follow a random walk process or more words that are not eligible for mean reversion. But the price and cash returns index index the result shows that only 1% error level was confirmed that the mean reversion. Error levels of 5% and 10% of the rest of the process did not follow a random walk and mean reversion confirmed. In general, the performance of the Tehran Stock Exchange Index and fifty top companies indicate But the price and returns index results in poor performance suggests a lack of cash.