Market dependence and economic events.

Recent studies on stock market pricing have rejected the random walk model for short term periods and are concentrating on long term persistent or mean-reverting dependence. The problem with these studies is that their statistical results can be biased by the shorter term dependence. Rather than trying to develop a unified theory that explains both short and long term dependence, current studies use different methodologies to correct for the short term dependence while trying to test for long term dependence. This paper uses a sequential information theory to focus attention on short term dependence effects. This theory states that the market process is a nonstationary mean process surrounded by a nonstationary autocovariance error process. A nonstationary mean process implies short term dependence resulting from changing economic events (new information). Long term persistent dependence then derives from nonperiodic economic cycles. A new empirical approach, a cross-sectional autocorrelation coefficient is used since it is free from the stationarity problems of previous techniques.

Main Author: Nawrocki, David.
Language: English
Published: 1996
Online Access: http://ezproxy.villanova.edu/login?url=https://digital.library.villanova.edu/Item/vudl:178243