Is there conditional mean reversion in stock returns?
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In this dissertation, market efficiency means that stock prices fully reflect available information. In this sense, in order to claim that the stock market is efficient, we must know the true available information and the correct equilibrium price (return) model used in setting the stock price. This is in fact a very strong requirement which makes it virtually impossible to test for market efficiency, for in the real world we do not know the true available information and the true equilibrium price model. Therefore, all we can do in testing for market efficiency is to investigate whether or not for a given proposed equilibrium price model, the behavior of the observed stock price complies with the observed market information. Market efficiency has been one of the most important research topics in finance for the past several decades. Early empirical research seems to support the efficient markets hypothesis to a large extent. However, since the late 1970s, the assertion that the stock market is efficient has come under serious attack. No unanimous conclusion on market efficiency has been reached so far. The primary goal of this research is not to resolve the dispute over market efficiency but to develop a test to examine market efficiency from a new perspective.