Re-Examining Variance-Bounds Tests for Asset Prices

Posted: 29 May 1998

See all articles by Robert A. Amano

Robert A. Amano

Bank of Canada & CREFE

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Abstract

The hypothesis of market efficiency is typically rejected by standard variance-bounds tests which assume stationary asset prices. A number of researchers, however, argue that tests used in previous studies are inappropriate since asset prices appear to be generated by nonstationary processes. In this paper, we propose a regression-based variance-bounds test that is valid when the asset price is an integrated process. We apply this test to annual U.S. data over the 1889 to 1985 sample period using measures of the perfect-foresight price constructed from a nonlinear asset-pricing equation that allows for a stochastic discount parameter. The results suggest that the data appear consistent with a version of the efficient-market hypothesis detailed in this paper.

JEL Classification: E44, G12

Suggested Citation

Amano, Robert A. and Wirjanto, Tony S., Re-Examining Variance-Bounds Tests for Asset Prices. Review of Quantitative and Finance Accounting, Vol. 10, March 1998. Available at SSRN: https://ssrn.com/abstract=93568

Robert A. Amano (Contact Author)

Bank of Canada & CREFE ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8827 (Phone)
613-782-7163 (Fax)

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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