Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test

47 Pages Posted: 25 Jul 2007 Last revised: 9 Sep 2008

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

A. Craig Mackinlay

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

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

Lo, Andrew W. and MacKinlay, Archie Craig, Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test (February 1987). NBER Working Paper No. w2168. Available at SSRN: https://ssrn.com/abstract=346975

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Archie Craig MacKinlay

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