The purpose of this paper is to examine the presence of unit roots in the stock prices of 16 OECD countries.
Heterogeneous panel unit root tests developed by Im et al. (1997/2003) and Pesaran (2007).
Under the assumption of cross-sectional independence across the panel, the authors find no evidence of unit roots, thus failing to reject mean reversion in the stock prices for all the countries in the sample. However, under the assumption of cross-sectional dependence, an assumption borne out by the diagnostic test results, the authors find support for the presence of unit roots in the stock prices.
Thus, the use of more robust panel unit root tests seems to raise questions about the long-run predictability of the stock market, at least in the context of the OECD countries.
Thus, it seems that in the long run, an investment policy of buy and hold has still much to offer.
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