Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130020
Authors: 
Linton, Oliver
Smetanina, Katja
Year of Publication: 
2015
Series/Report no.: 
cemmap working paper, Centre for Microdata Methods and Practice CWP08/15
Abstract: 
We propose an alternative Ratio Statistic for measuring predictability of stock prices. Our statistic is based on actual returns rather than logarithmic returns and is therefore better suited to capturing price predictability. It captures not only linear dependence in the same way as the variance ratio statistics of Lo and MacKinlay (1988) but also some nonlinear dependencies. We derive the asymptotic distribution of the statistics under the null hypothesis that simple gross returns are unpredictable after a constant mean adjustment. This represents a test of the weak form of the Efficient Market Hypothesis. We also consider the multivariate extension, in particular, we derive the restrictions implied by the EMH on multiperiod portfolio gross returns. We apply our methodology to test the gross return predictability of various financial series.
Subjects: 
Variance Ratio Tests
Martingale
Predictability
JEL: 
C10
C22
G10
G14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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