Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T07:08:30.006Z Has data issue: false hasContentIssue false
  • English
  • Français

Tests of the Random Walk Hypothesis Against a Price-Trend Hypothesis

Published online by Cambridge University Press:  06 April 2009

Stephen J. Taylor
Get access Rights & Permissions [Opens in a new window]

Extract

Forecasts of financial prices, calculated from the present and past values, are never substantially more accurate than the prediction that future prices will equal the most recently observed price. This conclusion has been summarized by two hypotheses. First, the random walk hypothesis, states that daily returns are uncorrelated. Few people believe that this is exactly correct; indeed, the hypothesis has been refuted both for small stock markets [13] and for American commodity futures markets [3]. Second, the weak-form efficient market hypothesis, as defined by Jensen [15], states that investors cannot make profits from any correlation between returns, after deducting all the costs of trading and adjusting for risk. Strict efficiency, is a special case that occurs when prices fully reflect all information available in the past prices [7], [8].

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 17 , Issue 1 , March 1982 , pp. 37 - 61
Copyright
Copyright © School of Business Administration, University of Washington 1982

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Anderson, T. W., and Walker, A. M.. “On the Asymptotic Distribution of the Autocorrelations of a Sample from a Linear Stochastic Process.” Annals of Mathematical Statistics, Vol.35 (1964), pp. 1296–1303.Google Scholar
[2]Blattberg, R. C, and Gonedes, N. J.. “A Comparison of the Stable and Student Distributions as Statistical Models for Stocks Prices.” Journal of Business, Vol. 47 (1974), pp. 244–280.CrossRefGoogle Scholar
[3]Cargill, T. F., and Rausser, G. C.. “Temporal Price Behaviour in Commodity Futures Markets.” Journal of Finance, Vol. 30 (1975), pp. 1043–1053.Google Scholar
[4]Cornell, W. B., and Dietrich, J. K.. “The Efficiency of the Market for Foreign Exchange under Floating Exchange Rates.” Review of Economics and Statistics, Vol. 60 (1978), pp. 111–120.Google Scholar
[5]Dryden, M. M. “A Statistical Study of U.K. Share Prices.” Scottish Journal of Political Economy, Vol. 17 (1970), pp. 369–389.Google Scholar
[6]Fama, E. F. “The Behaviour of Stock Market Prices.” Journal of Business, Vol. 38 (1965), pp. 34–105.Google Scholar
[7]Fama, E. F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance, Vol. 25 (1970), pp. 383–417.CrossRefGoogle Scholar
[8]Fama, E. F.Foundations of Finance. Oxford: Basil Blackwell (1976).Google Scholar
[9]Fielitz, B. D. “Stationarity of Random Data: Some Implications for the Distribution of Stock Price Changes.” Journal of Financial and Quantitative Analysis, Vol. 6 (1971), pp. 1025–1034.Google Scholar
[10]Granger, C. W. J., and Newbold, P.. Forecasting Economic Time Series. New York: Academic Press (1977).Google Scholar
[11]Greene, M. T., and Fielitz, B. D.. “Long-term Dependence in Common Stock Returns.” Journal of Financial Economics, Vol. 4 (1977), pp. 339–349.Google Scholar
[12]Guimaraes, R. M. C. “National Planning of Commodity Import Operations: The Case of Portugal's Feed Grain Imports.” Ph.D. thesis, Lancaster University (1981).Google Scholar
[13]Jennergren, L. P., and Korsvold, P. E.. “Price Formation in the Norwegian and Swedish Stock Markets—Some Random Walk Tests.” Swedish Journal of Economics, Vol. 76 (1974), pp. 171–185.Google Scholar
[14]Jennergren, L. P., and Toft-Nielsen, P.. “An Investigation of Random Walks in the Danish Stock Market.” Nationalokonimsk Tiddskrift, Vol. 2 (1977), pp. 254–269.Google Scholar
[15]Jensen, M. C. “Some Anomalous Evidence regarding Market Efficiency, an Editorial Introduction.” Journal of Financial Economics, Vol. 6 (1978) pp. 95–101.Google Scholar
[16]Labys, W. C, and Thomas, H. C.. “Speculation, Hedging and Commodity Price Behaviour: An International Comparison.” Applied Economics, Vol. 7 (1975), pp. 287–301.Google Scholar
[17]Leuthold, R. M. “Random Walks and Price Trends: The Live Cattle Futures Market.” Journal of Finance, Vol. 27 (1972), pp. 879–889.Google Scholar
[18]Levich, R. M.The International Money Market: An Assessment of Forecasting Techniques and Market Efficiency. Greenwich, CT: JAI Press (1979).Google Scholar
[19]Lomnicki, Z. A., and Zaremba, S. K.. “On the Estimation of Autocorrelation in Time Series.” Annals of Mathematical Statistics, Vol. 28 (1957), pp. 140–158.CrossRefGoogle Scholar
[20]Moran, P. A. P. “Some Theorems on Time Series II.” Biometrika, Vol. 35 (1948), pp. 255–260.Google Scholar
[21]Moran, P. A. P. “Tests for Serial Correlation with Exponentially Distributed Variates.” Biometrika, Vol. 54 (1967), pp. 395–401.Google Scholar
[22]Oldfield, G. S., and Rogalski, R. J.. “A Theory of Common Stock Returns over Trading and Non-Trading Periods.” Journal of Finance, Vol. 35 (1980), pp. 729–751.Google Scholar
[23]Praetz, P. D. “Australian Share Prices and the Random Walk Hypothesis.” Australian Journal of Statistics, Vol. 11 (1969), pp. 123–139.Google Scholar
[24]Praetz, P. D. “On the Methodology of Testing for Independence in Future Prices: Comment.” Journal of Finance, Vol. 31 (1976), pp. 977–979.CrossRefGoogle Scholar
[25]Praetz, P. D. “Testing for a Flat Spectrum on Efficient Market Price Data.” Journal of Finance, Vol. 34 (1979), pp. 645–658.Google Scholar
[26]Taylor, S. J. “Time Series Properties and Models of Commodity Prices.” Ph.D. thesis, Lancaster University (1978).Google Scholar
[27]Taylor, S. J. “Conjectured Models for Trends in Financial Prices, Tests and Forecasts.” Journal of the Royal Statistical Society, Series A, Vol. 143 (1980), pp. 338–362.Google Scholar
[28]Taylor, S. J. “Financial Returns Modelled by the Product of Two Stochastic Processes, a Study of Daily Sugar Prices, 1969–79.” In Time Series Analysis: Theory and Practice I, Anderson, O.D., ed. Amsterdam: North-Holland (forthcoming).Google Scholar
[29]Taylor, S. J., and Kingsman, B. G.. “Non-stationarity in Sugar Prices.” Journal of the Operational Research Society, Vol. 29 (1978), pp. 971–980.CrossRefGoogle Scholar
[30]Taylor, S. J. “An Analysis of the Variance and Distribution of Commodity Price-Changes.” Australian Journal of Management, Vol. 4 (1979), pp. 135–149.CrossRefGoogle Scholar
[31]Westerfield, R. “The Distribution of Common Stock Price Changes: An Application of Transaction Times and Subordinated Stochastic Models.” Journal of Financial and Quantitative Analysis, Vol. 12 (1977), pp. 743–766.Google Scholar