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A Variance Ratio Test of the Behaviour of Some FTSE Equity Indices Using Ranks and Signs

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Author Info
Jorge Belaire-Franch ()
Kwaku Opong ()

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Abstract

This study utilises tests based on ranks and signs suggested by Wright (2000) in addition to the traditional variance ratio test to examine the behaviour of some UK Financial Times Stock Exchange (FTSE) stock indices. The results suggest that the null hypothesis of martingale difference behaviour of the index returns series examined in the study is rejected. The use of the nonparametric based variance ratio tests provide stronger evidence against the martingale difference behaviour than the conventional variance ratio tests, under conditions of both homoskedasticity and heteroskedasticity for the examined series. Moreover, the application of Wright’s variance ratio tests in a rolling window framework, indicates that the results for the FTSE returns are consistent neither with a linear AR assumption nor with the white noise hypothesis. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11156-005-5328-3
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 24 (2005)
Issue (Month): 1 (January)
Pages: 93-107
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Handle: RePEc:kap:rqfnac:v:24:y:2005:i:1:p:93-107

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Related research
Keywords: variance ratio; heteroskedasticity; ranks; signs; random walk; martingale difference;

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  1. Hamill, Philip A & Opong, Kwaku K & Sprevak, Dan, 2000. "The Behaviour of the Irish ISEQ Index: Some New Empirical Tests," Applied Financial Economics, Taylor and Francis Journals, vol. 10(6), pages 693-700, December. [Downloadable!] (restricted)
  2. Ayadi, O. Felix & Pyun, C. S., 1994. "An application of variance ratio test to the Korean securities market," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 643-658, September. [Downloadable!] (restricted)
  3. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May. [Downloadable!] (restricted)
  4. Errunza, Vihang, et al, 1994. "Conditional Heteroskedasticity and Global Stock Return Distributions," The Financial Review, Eastern Finance Association, vol. 29(3), pages 293-317, August.
  5. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July. [Downloadable!] (restricted)
  6. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 41-66. [Downloadable!] (restricted)
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  7. Butler, Kirt C. & Malaikah, S. J., 1992. "Efficiency and inefficiency in thinly traded stock markets: Kuwait and Saudi Arabia," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 197-210, February. [Downloadable!] (restricted)
  8. Willey, Thomas, 1992. "Testing for nonlinear dependence in daily stock indices," Journal of Economics and Business, Elsevier, vol. 44(1), pages 63-76, February. [Downloadable!] (restricted)
  9. Liu, Christina Y & He, Jia, 1991. " A Variance-Ratio Test of Random Walks in Foreign Exchange Rates," Journal of Finance, American Finance Association, vol. 46(2), pages 773-85, June. [Downloadable!] (restricted)
  10. Andrew W. Lo & A. Craig MacKinlay, 1988. "The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation," NBER Technical Working Papers 0066, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December. [Downloadable!] (restricted)
  12. Greene, Myron T. & Fielitz, Bruce D., 1977. "Long-term dependence in common stock returns," Journal of Financial Economics, Elsevier, vol. 4(3), pages 339-349, May. [Downloadable!] (restricted)
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