Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test
47 Pages Posted: 25 Jul 2007 Last revised: 5 Dec 2022
Date Written: February 1987
Abstract
In this paper, we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (1962-1985) and for all sub-periods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are largely due to the behavior of small stocks, they cannot be ascribed to either the effects of infrequent trading or time-varying volatilities. Moreover, the rejection of the random walk cannot be interpreted as supporting a mean-reverting stationary model of asset prices, but is more consistent with a specific nonstationary alternative hypothesis.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
On Estimating the Expected Return on the Market: An Exploratory Investigation
-
Testing the Random Walk Hypothesis: Power Versus Frequency of Observation
By Robert J. Shiller and Pierre Perron
-
The Use of Volatility Measures in Assessing Market Efficiency
-
The Instantaneous Capital Market Line
By Lars Tyge Nielsen and Maria Vassalou
-
The Predictive Power of Price Patterns
By Gunduz Caginalp and Henry Laurent
-
Is it Real, or is it Randomized?: A Financial Turing Test
By Jasmina Hasanhodzic, Andrew W. Lo, ...