THRESHOLD MEAN REVERSION IN STOCK PRICES

AbstractThis chapter studies efficient capital market hypothesis and checks whether adjustment stock prices dynamics is instantaneous, continuous, or linear. In particular, we propose to analyze stock prices evolution while taking into account the presence of transaction costs, the coexistence of heterogeneous investors and the interdependence between stock markets. Thus, we show, on the one hand, that efficiency hypothesis is rejected. On the other hand, we prove that stock indexes adjustment is rather discontinuous, asymmetrical, and nonlinear. While using threshold cointegration techniques, we propose a new nonlinear representation to reproduce CAC40 adjustment dynamics that not only replicates French market adjustment dynamics in presence of market frictions, but also it captures interdependence between French and American stock markets and reaction of French shareholders in relation to American speculators behavior change.