Journal of Finance and Investment Analysis

Long-run Cointegration and Market Equilibrium in Large Cap Stocks

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• Abstract

  Although stock returns are thought to be stationary and showing mean-reverting behaviors, stock price levels don’t have to follow this manner. This paper finds that the general market condition has a commanding power on stock price level movements which are non-stationary individually but with statistically significant long-run cointegration relationships within sub-groups of large cap stocks in the U.S. market. Moreover, the vector error-correction models provide significant evidences that the short-run stock price level movements can be very volatile and show a reluctant behavior of returning to the long-run equilibrium. However, the estimated and the predicted cointegration parameters provide statistical evidences that the long-run equilibrium relationships are solid and stationary over time.

  JEL classification numbers: G12; G14; G17
  Keywords: Cointegration, Market Equilibrium, Stock Price Level