| Summary: | Using 11 OECD countries data, this study employs a Markov Switching unit root regression to investigate the issue of the non-stationarity and non-linearity of stock prices. The results convincingly support the view that the stock prices in the OECD countries are characterized by a two-regime Markov Switching unit root process. For Australia, Austria, Belgium, Finland, Iceland, Ireland, Netherlands and New Zealand, stock prices are characterized by a unit root process, consistent with the efficient market hypothesis that the stock price is either in the high-volatility regime or in the low-volatility regime. For Czech Republic, Denmark and Greece, the shocks to stock prices are highly persistent in one regime, but have finite lives in the other regime. The high-volatility regime arises in most of the countries considered and it tends to prevail over a relatively long period.
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