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Testing for the Existence of a Generalized Wiener Process- the Case of Stock Prices

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In this article, we present two nonparametric trispectrum based tests for testing the hypothesis that an observed time series was generated by what we call a generalized Wiener process (GWP). Assuming the existence of a Weiner process for asset rates of return is critical to the Black-Scholes model and its extension by Merton (BSM). The Hinich trispectrum-based test of linearity and the trispectrum extension of the Hinich-Rothman bispectrum test for time reversibility are used to test the validity of BSM. We apply the tests to a selection of high frequency NYSE and Australian (ASX) stocks.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 408.

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Date of creation: 2010
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Handle: RePEc:qld:uq2004:408

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  1. 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, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  2. Hinich, Melvin J & Patterson, Douglas M, 1985. "Evidence of Nonlinearity in Daily Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(1), pages 69-77, January.
  3. Savin, N.E., 1984. "Multiple hypothesis testing," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 14, pages 827-879 Elsevier.
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