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Testing for the Existence of a Generalized Wiener Process- the Case of Stock Prices

Melvin Hinich, Phillip Wild and John Foster (j.foster@uq.edu.au)

No 408, Discussion Papers Series from University of Queensland, School of Economics

Abstract: In this article, we present two nonparametric trispectrum based tests for testing the hypothesis that an observed time series was generated by what we call a generalized Wiener process (GWP). Assuming the existence of a Weiner process for asset rates of return is critical to the Black-Scholes model and its extension by Merton (BSM). The Hinich trispectrum-based test of linearity and the trispectrum extension of the Hinich-Rothman bispectrum test for time reversibility are used to test the validity of BSM. We apply the tests to a selection of high frequency NYSE and Australian (ASX) stocks.

Date: 2010
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