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Are the Australian and New Zealand stock prices nonlinear with a unit root?

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Whether or not stock prices are characterized by a unit root has important implications for policy. For instance, by applying unit root tests one can deduce whether stock returns can be predicted from previous changes in prices. A finding of a unit root implies that stock returns cannot be predicted. This paper investigates whether or not stock prices for Australia and New Zealand can be characterized by a unit root process. An unrestricted two-regime threshold autoregressive model is used with an autoregressive unit root. Among the main results, it is found that the stock prices of both countries are nonlinear processes that are characterized by a unit root process, consistent with the efficient market hypothesis.

Document Type: Research Article


Affiliations: Griffith Business School, Department of Accounting, Finance and Economics, Gold Coast Campus, Griffith University, PMB 50 Gold Coast MC, Queensland 9726, Australia

Publication date: October 10, 2005

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