New Variance Ratio Tests to Identify Random Walk from the General Mean Reversion Model

Kin Lam, May Chun Mei Wong and Wing-Keung Wong ()
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Kin Lam: Department of Finance & Decision Sciences, Hong Kong Baptist University
May Chun Mei Wong: Dental Public Health, The University of Hong Kong

Departmental Working Papers from National University of Singapore, Department of Economics

Abstract: We develop some properties on the autocorrelation of the k-period returns for the general mean reversion (GMR) process in which the stationary component is not restricted to the AR(l) process but take the form of a general ARMA process. We then derive some properties of the GMR process and three new non-parametric tests comparing the relative variability of returns over different horizons to validate the GMR process as an alternative to random walk. We further examine the asymptotic properties of these tests which can then be applied to identify random walk models from the GMR processes.

Keywords: mean reversion; variance ratio test; random walk; stock price; stock return (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin and nep-fmk
Date: 2005
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Persistent link: http://EconPapers.repec.org/RePEc:nus:nusewp:wp0514

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