Do stock markets follow a random walk? New evidence for an old question

Abstract

This paper re-examines whether the stock markets are efficient or not by focusing the role of cross-sectional dependency and structural breaks with newly developed panel unit root tests proposed by Lee, Wu, and Yang (2016) and Nazlioglu and Karul (2017). To do this, we used 33 countries stock price indexes for the period 1992M05 – 2018M05. Our results indicate that (i) accounting for cross-sectional dependency and structural breaks play an important role for better understanding the behavior of the stock market indices, (ii) recent testing methodologies provide a strong evidence for the weak-form efficiency of stock markets, (iii) the stationarity property of series is consistent regardless of whether capturing structural shifts as sharp or gradual process, (iv) modelling approach to cross-section dependency matters for deciding whether stock prices can be characterized as random walk or mean reversion processes. © 2019 Elsevier Inc.