ABSTRACT
Chaudiri and Wu (2002) state that “Much of the controversy on the issue of mean reversion arises because the speed of reversion may be slow and standard econometric tests do not have suffi cient power to discriminate a mean reversion process from a random walk process. In this chapter, we test for mean reversion in stock price indexes of five emerging markets in the Middle East using monthly data from January 1996 through April 2008. Our results provide useful information from this independent sample, and complement the existing studies on stock market efficiency in the Middle East and North Africa (MENA). Chaudhuri and Wu (2002) state that “To overcome the power deficiency problem, we conduct the test in a panel framework. We pool data of five neighboring countries in the Gulf region and utilize the information on the cross-sectional varia tions in equity returns to increase the power of the test so that mean reversion can be more easily detected. To further improve estimation efficiency, we estimate the system of equations using the seemingly unrelated regression (SUR) technique. We find that the null hypothesis of a random walk can be rejected in favor of mean reversion for two stock index prices.
