Abstract
The purpose of this study is to determine the presence of mean reversion in the stock markets indices of Pakistan, moreover, to measure, and compare the speed of mean reversion of the stock markets indices across Pakistan. In order to carry out the research study, the daily data of three stock indices of Pakistan such as: KSE-100, LSE-25 and ISE-10 are collected from 2003 to 2014. After the application of tests such as ARCH and GARCH, it was found that returns series of KSE-100, LSE-25 and ISE-10 indices exhibit mean reversion, indicating that the returns revert back to their historical value after reaching an extreme value. Further, the mean reversion rate shows that KSE-100 index has the slowest mean reversion, however, the ISE-10 index has the fastest mean reversion among the three indices. Therefore, the results of the study concluded that KSE-100 index, due to the slowest mean reversion rate has higher volatility over a longer period of time. On the contrary, since, ISE-10 index has exhibited the fastest mean reversion with the lowest volatility as compared to others. But due to fast mean reversion rate, it will help investors to gain profits over a shorter period of time. Thus, it can be recommended that the investor willing to bear the risk of time and looking for long-term investment should invest in KSE-100 index. However, investors looking for higher profits in a shorter period can invest in the ISE-10 index but with higher risk-returns trade-off.
Highlights
IntroductionSince the 1970s, one of the frameworks for the asset-pricing model has become a central proposition for the market prices
In addition to the mean, the standard deviation value indicates that on an average the KSE-100 index returns deviate from its mean value by 1.347, whereas returns of the LSE-25 index and ISE-10 index deviate from its mean value by 1.752 and 1.861 respectively
Negative skewness value of KSE-100 index returns and LSE-25 index returns indicate that the left tail of the return series is long
Summary
Since the 1970s, one of the frameworks for the asset-pricing model has become a central proposition for the market prices. This proposition, which was considered as the core of finance, is known as the efficient market hypothesis. Org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Palwasha et al Speed of mean reversion: an empirical analysis
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
