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Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test (1988)
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| Venue: | REVIEW OF FINANCIAL STUDIES |
| Citations: | 517 - 17 self |
BibTeX
@ARTICLE{Lo88stockmarket,
author = {Andrew W. Lo and A. Craig MacKinlay},
title = {Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test},
journal = {REVIEW OF FINANCIAL STUDIES},
year = {1988},
volume = {1},
number = {1},
pages = {41--66}
}
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Abstract
In this article 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 subperiod for a variety of aggregate returns indexes and size-sorted portofolios. Although the rejections are due largely to the behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or timevarying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a mean-reverting model of asset prices.
Keyphrases
follow random walk simple specification test stock market price infrequent trading aggregate return index weekly return entire sample period mean-reverting model different frequency random walk small stock variance estimator asset price random walk model weekly stock market return size-sorted portofolios
