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Testing for the martingale hypothesis in Asian stock prices: evidence from a new joint variance ratio test

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  • Jae H. Kim

Abstract

This paper tests for the martingale (or random walk) hypothesis in the stock prices of a group of Asian countries. The selected countries represent well-developed markets (Hong Kong and Japan) as well as emerging markets (Korea, Taiwan and Thailand). This paper adopts a new joint variance ratio test which is a finite sample test based on the wild bootstrap method. It is different from the conventional variance ratio tests in that its sampling distribution is approximated by a resampling method, which has been found to exhibit better small sample properties than the asymptotic method. The test for the martingale hypothesis is conducted with moving-subsample windows, to control the sensitivity of the results to the particular sample periods. Overall, it is found that the stock prices of Japan, Korea, and Hong Kong are found to follow the martingale, indicating that their stock markets have been efficient.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 98.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:98

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Keywords: Martingale hypothesis; Stock Market Efficiency; Variance Ratio Test; Wild bootstrap;

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  1. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 227-54.
  2. Whang, Yoon-Jae & Kim, Jinho, 2003. "A multiple variance ratio test using subsampling," Economics Letters, Elsevier, vol. 79(2), pages 225-230, May.
  3. Wright, Jonathan H, 2000. "Alternative Variance-Ratio Tests Using Ranks and Signs," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 1-9, January.
  4. Yilmaz, Kamil, 2003. "Martingale Property of Exchange Rates and Central Bank Interventions," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 383-95, July.
  5. Ruiz, Esther & Pascual, Lorenzo, 2002. " Bootstrapping Financial Time Series," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 271-300, July.
  6. Pan, Ming-Shiun & Chan, Kam C. & C.W. Fok, Robert, 1997. "Do currency futures prices follow random walks?," Journal of Empirical Finance, Elsevier, vol. 4(1), pages 1-15, January.
  7. Hyun-Jung Ryoo & Graham Smith, 2002. "Korean stock prices under price limits: variance ratio tests of random walks," Applied Financial Economics, Taylor & Francis Journals, vol. 12(8), pages 545-553.
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