The Stochastic Behavior of Stock Indices: A Test of Long Memory in the Kuala Lumpur Stock Exchange

Department of Finance
Faculty of Business Management
Universiti Kebangsaan Malaysia
43600 UKM Bangi, Selangor D.E. Malaysia


Abstract

Characterization of the stochastic process of stock market indices is vital in understanding the behavior of stock prices. Conventional share valuation models are subject to the nature of inter-temporal dependence between current and past movements. This paper studies the stochastic process of four KLSE indices (Composite Index, Industrial Index, Finance Index, and Property Index). In addition to the standard unit root tests, the ARFIMA (Autoregressive Fractionally Integrated Moving Average) model which belongs to the class of long memory process is applied in the empirical analysis. The findings indicate that while the level of the indices is non stationary, its growth rate exhibits stationary properties. Long memory is not supported for the level of the indices but is evidenced in its monthly growth rate. The growth rate of the indices can therefore be characterized as a long memory process that is mean reverting.

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Citation

Ghazali, N. A. (1998). The Stochastic Behavior of Stock Indices: A Test of Long Memory in the Kuala Lumpur Stock Exchange. Jurnal Pengurusan, 17, 31–40.

@article{ghazali1998stochastic,
  title={The Stochastic Behavior of Stock Indices: A Test of Long Memory in the Kuala Lumpur Stock Exchange},
  author={Ghazali, Noor Azlan},
  journal={Jurnal Pengurusan},
 

volume={17},
  number={},
  pages={31—40},
  year={1998},
  doi={},
  publisher={Penerbit UKM},
}

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17 (1998) 31 – 40

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