Individual stock market risk and price valuation: the case of Titan S.A.

Abstract

PurposeThe purpose of this study is twofold: to test the hypothesis that the closing prices of Titan S.A. stock can be approximated by a random walk; and to valuate the risk associated to this stock. The first question is equivalent to the efficient market hypothesis (EMH) and, therefore, to the predictability of stock's closing price. The second question follows the first in a natural way, since stock's predictability and risk are in an inverse relationship.Design/methodology/approachThe paper investigates the existence of unit roots in the stock and in all stock index, in the lines of Dicky‐Fuller modeling. It then investigates the stock's risk focusing the interest in the behavior of the time series volatility under the hypothesis that they can be described by an autoregressive scheme. Finally, it looks at the relationship between stock returns and market returns in the lines of the market model.FindingsThe study concludes that although the predictability of the stock returns is impossible, the risk associated with the stock can to some extent be statistically rationalised.Originality/valueThe paper's value lies in looking into the probability that if the EMH is even approximately true, accepting above‐average risks is the only way to obtain better‐than‐average returns.