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

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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

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    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.
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    1. Ren, Xiyu & Marotta, Fulvia & Lafond, François, 2025. "Do common shocks drive changes in aggregate emissions intensity?," INET Oxford Working Papers 2025-15, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.

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