Mean Reversion: An Investigation From Karachi Stock Exchange Sectors

Abstract

This article analyses the sectors of Karachi stock exchange in order to determine if there is any presence of mean reversion phenomenon in the stock market sectors and also an attempt to determine the pace of mean reversion. To conduct this research, secondary data is collected from the State Bank Bulletin. The frequency of the data is monthly. The variables include the individual; the data was obtained from 24 sectors returns over the period of 17 years from January 1992 to June 2008. The GARCH (1, 1) model was used to find the outcomes and the effects. In the two sectors out of 24 sectors, the GARCH and ARCH effects were significant, namely, in the Jute and Banks & Investment Companies. We studied the mean reverting process in the KSE sectors over a specific time period. Since, the mean reversion varies over different time periods. Therefore, it would be a good area for future research to study the reasons, why the market reacts differently over different time periods and to determine the reasons for such variations. The paper contributes to Stock Prices returns and investment opportunities by studying the Mean Reversion Phenomenon.

Speed of Mean Reversion: An Empirical Analysis of Kse, Lse and Ise Indices

“…Therefore, enabling investors to forecast future returns on the basis of their historical value helping them in earning above average returns. Thus, supporting the studies of Chen and Hsu (2016), Vveinhardt et al (2016), Chaves and Viswanathan (2016), Lal et al (2016), Chaudhuri and Wu (2003), Riaz (2014), Poterba and Summers (1987), Malliaropulos and Priestley (1996), Mustafa and Ahmed (2013), Balvers et al (2000) etc. who also found the existence of mean reversion in different stock indices of the world.…”

“…According to Bollerslev (1986), the series are stationary or mean reverting if the sum of both coefficients is less than 1 (α+β < 1). Thus, Table 4 indicates that returns series of KSE-100 index, LSE-25 index, and ISE-25 index show a mean reversion, which means Vveinhardt et al (2016), Chaudhuri and Wu (2003), Riaz (2014), Poterba and Summers (1987), Malliaropulos and Priestley (1996), Mustafa and Ahmed (2013), Balvers et al (2000), Annaert and Hyfte (2005) etc. The speed of mean reversion in the stock indices.…”

“…It is further concluded that the existence of mean reversion in particular country varies from country to country or region to region. Moreover, as highlighted in the literature the few studies conducted on this topic for the Karachi stock exchange index, which has demonstrated the existence of mean reversion (e.g., Lal et al 2016;Vveinhardt et al 2016;etc.). Therefore, this study aims to contribute to the literature by identifying the presence of mean reversion in other stock exchange indices along with determining and comparing the pace of mean reversion of the stock markets indices of Pakistan.…”

“…In addition to above studies, few researchers have tried to found the existence of mean reversion in Karachi stock exchange also. These researchers include Lal et al (2016), Vveinhardt et al (2016), Riaz (2014), Mustafa and Ahmed (2013) found that Karachi stock exchange also exhibits mean reversion process.…”

“…On the other hand, those companies, which have high fundamental value, may be driven low. This causes companies, who have low fundamental values to raise capital easily as compared to companies with high fundamental values (e.g., Zakamulin 2016;Vveinhardt et al 2016;Engle, Morris 1991;etc. ).…”