Do Stock Returns in India Exhibit a Mean-Reverting Tendency? Evidence from Multiple Structural Breaks Test

Banking and Finance Letters, Vol. 2, Issue 4, pp. 371-390, 2010

20 Pages Posted: 24 Jun 2011 Last revised: 28 Dec 2014

See all articles by Gourishankar S. Hiremath

Gourishankar S. Hiremath

Indian Institute of Technology (IIT), Kharagpur - Department of Humanities and Social Sciences

Bandi Kamaiah

University of Hyderabad

Date Written: December 1, 2010

Abstract

This paper re-examines the issue of mean-reversion in the Indian equity market. Unlike earlier studies, the present paper carries out a multiple structural breaks test and uses a new and disaggregated data set. The study found significant structural breaks in the returns series of all selected indices, and thus provide evidence of mean-reverting tendency in the Indian stock returns.This implies the violation of the efficient market hypothesis in India. The endogenously searched significant structural breaks occurred in the years 2000, 2003, 2006, 2007 and 2008 for most of the indices respectively indicating a rise in international oil prices, global recession, erratic fluctuations in exchange rates, and the sub-prime crisis followed by global meltdown. The evidences of structural breaks and mean-reverting tendency indicates the possibility to predict the future returns. Further, it is observed that small indices with less liquidity and lower market capitalization are more vulnerable to external events than the liquid indices. The results call for appropriate policy and regulatory measures, particularly external shocks to improve the efficiency of the market.

Keywords: Multiple Structural Breaks, Mean Reversion, Market Efficiency, Random Walk, Global Economic Crisis; External Shocks; NSE; BSE, Indian stock market

JEL Classification: C58; G14

Suggested Citation

Hiremath, Gourishankar S. and Kamaiah, Bandi, Do Stock Returns in India Exhibit a Mean-Reverting Tendency? Evidence from Multiple Structural Breaks Test (December 1, 2010). Banking and Finance Letters, Vol. 2, Issue 4, pp. 371-390, 2010 , Available at SSRN: https://ssrn.com/abstract=1871232

Gourishankar S. Hiremath (Contact Author)

Indian Institute of Technology (IIT), Kharagpur - Department of Humanities and Social Sciences ( email )

Kharagpur, West Bengal 721302
India

Bandi Kamaiah

University of Hyderabad ( email )

Central University (PO)
Andhra Pradesh
Hyderabad, CA 500 046
India

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