The Possibility or Impossibility of Stock Price Prediction: Evidence from the Petrochemical Industry

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Economics, Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran.

2 Assistant Prof., Department of Economics, Faculty of Economic Sciences, Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran.

3 Associate Prof., Department of Economics, Faculty of Economic Sciences, Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran.

10.22059/frj.2023.359810.1007467

Abstract

Objective
Fama (1970) showed that stock markets have weak efficiency and follow the random walk model, so investors cannot achieve abnormal returns by using historical data. It is very important, therefore, to know about the stock price process. The refining and petrochemical industry companies’ stocks are among the most popular ones in the Iranian stock market because they often distribute appropriate dividends to shareholders and sometimes even have good price returns. Also, petrochemical companies are known as the leaders of the stock market, with a great effect on the main stock market index in Iran (TEPIX). This article is to test the random walk hypothesis or weak efficiency of daily stock prices in six petrochemical and three refining Iranian companies.
 
Methods
To test the random walk hypothesis, in the first stage, augmented Dickey-Fuller (ADF) unit root tests were conducted using the approaches proposed by Dolado et al. (1990) and Hamilton (1994), along with the Zivot and Andrews (ZA) unit root test incorporating an endogenous structural break. According to the first stage, GARCH (1.1) and Exponential GARCH approaches were used in the second stage to control the fluctuations and leverage effects in evaluating weak efficiency. Daily stock price data (adjusted) were used to test the weak efficiency hypothesis.
 
Results
The results of the augmented Dickey-Fuller (ADF) unit root test and the Zivot and Andrews endogenous structural break showed that Iranian companies of Nouri, Parsan, Pars, Tapico, Shepna and Shetran are pure random walk (weak efficiency). However, Fars, Shepdis, and Shabandar follow a random walk with drift, suggesting the absence of weak efficiency in these companies. In addition, the results of GARCH and exponential GARCH models showed that there is a positive relationship between risk and return for all seven companies. Also, volatility shocks in Fars, Nouri, Pars, and Tapico companies are completely permanent (weak performance). In addition, the shocks observed in Parsan, Shepdis, and Shatran companies are transient, with their effects dissipating over time, and the prices readjusted to the long-term mean, indicating the absence of weak efficiency. The evidence confirms that in these companies, the volatility caused by negative (adverse) news is more than the volatility caused by the same level of positive (favorable) news.
 
Conclusion
According to the findings of the two stages, Nouri, Pars, Tapico, and Shapna companies have weak efficiency which means that the stock price behavior of these companies cannot be predicted. On the other hand, Parsan, Shapedis, Shatran, Fars and Shabandar companies show weak efficiency which means that their stock price behavior is predictable. The results of this article have important implications for investors in the Iranian stock market. Market participants can engage in effective modeling for stocks that lack efficiency and exhibit predictable behavioral patterns to some extent. This allows them to gain insights into future prices and potentially earn profits.
 

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 26, Issue 1
2024
Pages 81-104

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