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A Runs Test for Stock-Market Prices with an Unobserved Trend

Author

Listed:
  • Nils Herger

    (Study Center Gerzensee)

Abstract

To analyze whether stock-market prices follow a random walk, the algebraic sign of their returns has been compared with a coin toss, which is a prominent example for a Bernoulli trial with equiprobable outcomes. Like coin tosses, signed returns lend themselves for a simple runs test for randomness. However, they typically comprise an unobserved trend, and therefore represent Bernoulli trials whose theoretical outcome probability is not easily known. Fortunately, the Von Neumann algorithm can trans- form Bernoulli trials with unknown outcome probabilities into equiprobable outcomes. Thus, a runs test on correspondingly transformed returns can handle an unobserved stock-market trend.

Suggested Citation

  • Nils Herger, 2024. "A Runs Test for Stock-Market Prices with an Unobserved Trend," Working Papers 24.01, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:2401
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    References listed on IDEAS

    as
    1. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
    2. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 15, pages 777-878, Elsevier.
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