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A non-random walk revisited: short- and long-term memory in asset prices

  • Paul Eitelman
  • Justin Vitanza
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    In this paper, we test for short and long memory in asset prices across 44 emerging and industrialized economies. Using methodology from Lo and MacKinlay (1988) and Lo (1991), we find that markets with a poor Sharpe ratio are more likely to reject the random walk than better performing markets. We also make a methodological contribution. Contrary to the Baillie (1996) criticism, our long memory analysis suggests that the choice of a truncation lag is not as important as one might initially believe. Tests that reject the null hypothesis tend to do so across any reasonable choice in lag.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/2008/956/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/2008/956/ifdp956.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 956.

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    Date of creation: 2008
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    Handle: RePEc:fip:fedgif:956
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    1. Giorgio Canarella & Stephen K. Pollard, 1985. "Efficiency of commodity futures: A vector autoregression analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(1), pages 57-76, 03.
    2. Lo, Andrew W. (Andrew Wen-Chuan), 1989. "Long-term memory in stock market prices," Working papers 3014-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. B. Mandelbrot, 1972. "Statistical Methodology for Nonperiodic Cycles: From the Covariance To R/S Analysis," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 1, number 3, pages 259-290 National Bureau of Economic Research, Inc.
    4. 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, vol. 1(1), pages 41-66.
    5. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    6. Bleaney, Michael F & Greenaway, David, 1993. "Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 349-63, July.
    7. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
    8. Benoit Mandelbrot & Adlai Fisher & Laurent Calvet, 1997. "A Multifractal Model of Asset Returns," Cowles Foundation Discussion Papers 1164, Cowles Foundation for Research in Economics, Yale University.
    9. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
    10. Andrew W. Lo & Craig A. MacKinlay, . "The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation," Rodney L. White Center for Financial Research Working Papers 28-87, Wharton School Rodney L. White Center for Financial Research.
    11. Mandelbrot, Benoit B, 1971. "When Can Price Be Arbitraged Efficiently? A Limit to the Validity of the Random Walk and Martingale Models," The Review of Economics and Statistics, MIT Press, vol. 53(3), pages 225-36, August.
    12. Dacorogna, Michael M. & Muller, Ulrich A. & Nagler, Robert J. & Olsen, Richard B. & Pictet, Olivier V., 1993. "A geographical model for the daily and weekly seasonal volatility in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 413-438, August.
    13. Chow, K Victor & Pan, Ming-Shium & Sakano, Ryoichi, 1996. " On the Long-Term or Short-Term Dependence in Stock Prices: Evidence from International Stock Markets," Review of Quantitative Finance and Accounting, Springer, vol. 6(2), pages 181-94, March.
    14. Marco Corazza & A.G. Malliaris & Carla Nardelli, 1997. "Searching for fractal structure in agricultural futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(4), pages 433-473, 06.
    15. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
    16. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
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