Volatility Mean Reversion and Stock Market Efficiency

Abstract

Traditional econometric models, such as the ordinary least square method, are built on the assumption of constant variance. Financial time series, unlike other economic series, usually exhibit a set of peculiar characteristics i.e. mean reversion, volatility clustering, fat tails and long memory. The main purpose of this study was to study market efficiency through modeling one stylized facts of asset returns series i.e. mean reversion in the Indian stock market. To achieve this purpose, the study used ADF test and GARCH model. The study found that the underlying series is stationary and therefore mean reverting. Therefore, based on the results the study concluded that, the Indian stock market is informationally weak-inefficient.