Random walk model and asymmetric effect in Korean composite stock price index

Abstract

This paper empirically examines the market efficiency and the volatility persistence of weekly stock returns of the Korean composite stock price index (KOSPI) since July 1997 till September 2016. It studies the market efficiency in presence of both linear and nonlinear dependence in the stock price series along with testing for structural breaks. By employing various econometric tests, evidence of weekly series not following a random walk model along with asymmetric volatility effects was found. The results have significant implications for investors and traders as market inefficiency can impact both domestic and foreign flows in an economy. This study is unique as it employs multiple tests for market efficiency along with examining volatility persistence over a wide time frame of almost two decades. Since the results on market efficiency are mixed for the Korean stock market this study aims to offer a more comprehensive picture.