Duration Dependence And Mean Reversion : An Attempt Of Identification In Tunisian Stock Market

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Azza Bejaoui
Adel Karaa
Emna Mahat

Keywords

Regime-Switching, Duration-Dependence, Mean-Reversion Process, Countercyclical Return Volatility

Abstract

This study investigates the duration dependence of Tunisian stock market over the period from January 07, 1998 to March 29, 2013; using two-state Duration Markov-switching model. Through this model, duration dependence is emphasized in the conditional mean return, volatility, risk-return trade-off and transition probabilities. We demonstrate that TUNINDEX index weekly returns can be sorted into bull and bear market states. Our results are consistent with mean reversion process; i.e. mean reversion is the tendency of asset prices to return to a trend path. Finally, we conclude that Tunisian stock market fluctuations can be characterized by the presence of the countercyclical return volatility due to the asymmetric movements of the risk premia.

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