Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test (Revised: 29-87)

Andrew Lo () and Craig A. MacKinlay

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: In this paper, we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (1962-1985) and for all sub-periods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are largely due to the behavior of small stocks, they cannot be completely attributed to either the effects of infrequent trading or time-varying volatilities. Moreover, the rejection of the random walk cannot be interpreted as supporting a mean-reverting model of asset prices, but is more consistent with a specific nonstationary alternative hypothesis.

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