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Testing the Martingale Hypothesis

Peter Phillips () and Sainan Jin

Journal of Business & Economic Statistics, 2014, vol. 32, issue 4, 537-554

Abstract: We propose new tests of the martingale hypothesis based on generalized versions of the Kolmogorov-Smirnov and Cramér-von Mises tests. The tests are distribution-free and allow for a weak drift in the null model. The methods do not require either smoothing parameters or bootstrap resampling for their implementation and so are well suited to practical work. The article develops limit theory for the tests under the null and shows that the tests are consistent against a wide class of nonlinear, nonmartingale processes. Simulations show that the tests have good finite sample properties in comparison with other tests particularly under conditional heteroscedasticity and mildly explosive alternatives. An empirical application to major exchange rate data finds strong evidence in favor of the martingale hypothesis, confirming much earlier research.

Date: 2014
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Working Paper: Testing the Martingale Hypothesis (2013) Downloads
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DOI: 10.1080/07350015.2014.908780

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