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The Random Walk Of Stock Prices: Implications Of Recent Nonpara-Metric Tests

Author

Listed:
  • Dahl, Christian M.

    (Purdue University)

  • Nielsen, Steen

    (Department of Economics, Copenhagen Business School)

Abstract

This paper applies six recently developed nonparametric tests of serial independence to monthly US stock returns. Findings of previous studies based on the BDS test are sup-ported since most of the new tests also reject the random walk hypothesis. Furthermore, power properties of the new tests are compared with those of the BDS test. The latter has much power against ARCH and GARCH alternatives whereas some of the more recent tests are superior against other alternatives. Finally, the power study of this paper shows, contrary to common belief, that ARCH and GARCH effects do not seem to explain rejec-tion of the random walk.

Suggested Citation

  • Dahl, Christian M. & Nielsen, Steen, 2001. "The Random Walk Of Stock Prices: Implications Of Recent Nonpara-Metric Tests," Working Papers 07-2001, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:2001_007
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7650
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    References listed on IDEAS

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    1. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," The Journal of Business, University of Chicago Press, vol. 62(3), pages 311-337, July.
    2. Pagan,Adrian & Ullah,Aman, 1999. "Nonparametric Econometrics," Cambridge Books, Cambridge University Press, number 9780521355643, May.
    3. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
    4. P. M. Robinson, 1991. "Consistent Nonparametric Entropy-Based Testing," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 437-453.
    5. Brock, W.A. & Dechert, W.D. & LeBaron, B. & Scheinkman, J.A., 1995. "A Test for Independence Based on the Correlation Dimension," Working papers 9520, Wisconsin Madison - Social Systems.
    6. Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-1877, December.
    7. Yongmiao Hong & Halbert White, 2005. "Asymptotic Distribution Theory for Nonparametric Entropy Measures of Serial Dependence," Econometrica, Econometric Society, vol. 73(3), pages 837-901, May.
    8. Ahmad, Ibrahim A. & Li, Qi, 1997. "Testing independence by nonparametric kernel method," Statistics & Probability Letters, Elsevier, vol. 34(2), pages 201-210, June.
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    Citations

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    Cited by:

    1. Hiremath, Gourishankar S & Bandi, Kamaiah, 2010. "Some Further Evidence on the Behaviour of Stock Returns in India," MPRA Paper 48518, University Library of Munich, Germany.
    2. Donald Brown & Rustam Ibragimov, 2005. "Sign Tests for Dependent Observations and Bounds for Path-Dependent Options," Yale School of Management Working Papers amz2581, Yale School of Management, revised 01 Jul 2005.
    3. Donald J. Brown & Rustam Ibragimov, 2005. "Sign Tests for Dependent Observations and Bounds for Path-Dependent Options," Cowles Foundation Discussion Papers 1518, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    Keywords

    Random walk; nonparametric tests; stock returns;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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