Alternative Variance-Ratio Tests Using Ranks and Signs

Jonathan Wright

Journal of Business & Economic Statistics, 2000, vol. 18, issue 1, 1-9

Abstract: This article proposes using variance-ratio tests based on the ranks and signs of a time series to test the null that the series is a martingale difference sequence. Unlike conventional variance-ratio tests, these tests can be exact. In Monte Carlo simulations, I find that they can also be more powerful than conventional variance-ratio tests. I apply the proposed tests to five exchange-rate series and find that they are capable of detecting violations of the martingale hypothesis for all five series, whereas conventional variance-ratio tests yield ambiguous results.

Date: 2000
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