# Testing the Random Walk Hypothesis

Powerful Essays
Statistical Methods & Capital Markets
Testing Random Walk Hypothesis
Nicolas Mancini

* Table of Content

Abstract
Theoretical background
Methodology
Data & Results
Comparison
Conclusion
References

-------------------------------------------------

I. Abstract

The aim of this paper is to test the random walk hypothesis by applying the runs test on time series of several selected stocks. The random walk theory is the theory that stock prices changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement. Shortly said it is the idea that stocks take a random and unpredictable path.
The motivation behind this work is to analyze whether the random walk hypothesis is valid in different periods of time. Therefore we will use recent data and more distant data in order to draw a conclusion. Furthermore it could be interesting to compare results for companies that are not specifically active the same industry.
The runs test will be carried out with the R software, a free software, though really powerful, for environmental and statistical computings and graphics. II. Theoretical background

Introduced for the first time by Burton Malkiel in his top-seller « A Random Walk Down Wall Street » in 1973, the model of random walk might be a reasonable approximation to the true dynamics of stock log prices. Random walk time series are time series {xt : t = 0,1,2,…} starting with x0, where any value over time can be calculated as follows : xt = xt-1 + at (for t >= 0) and where {at : t = 0,1,2,…} are sequences of independent and identically distributed random variables with zero mean. The independence of increments implies that the probability of the increment at is not influenced by past values. A mathematical formulation for this would be : P(at at-1, at-2,…) = P(at). The identical distribution of increments means that the

## You May Also Find These Documents Helpful

• Powerful Essays

Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test Andrew W. Lo A. Craig MacKinlay University of Pennsylvania 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 (19621985) and for all subperiod for a variety of aggregate returns indexes and size-sorted portofolios. Although…

• 9644 Words
• 39 Pages
Powerful Essays
• Good Essays

2.1.1 The Theory of Random Walk Fama (1965) stated that successive values of a stock are independent of each other and random in nature. This random event which is caused by the changes in stock information is known as the random walk hypothesis. To provide a more detail explanation, Fama (1965) mentioned that a random walk evolves from the basis of the stock market being an efficient market, which explains that a stock market consists of many unreasonable investors competing with one another to…

• 1289 Words
• 6 Pages
Good Essays
• Good Essays

Release date: 27 April 2014 Submission date: 9 May 2014 TUTORIAL ON HYPOTHESIS TESTING (1) Basic Concept 1. State the null and alternative hypothesis for each conjecture : a. A researcher thinks that if expectant mothers use vitamin pills, the birth weight of the babies will increase. The average birth weight of the population is 3.0kg. b. An engineer hypothesizes that the mean number of defects can be decreased in a manufacturing process of compact disks by using robots instead of humans…

• 1203 Words
• 6 Pages
Good Essays
• Powerful Essays

Random Walk Test For KOREAN MARKET CONTENTS Part 1 Introduction Part 2 Data Part 3 Empirical Analysis Part 4 Extension Study Part 5 Summary INTRODUCTION ABOUT THE TOPIC  Market efficiency and random walk theory  This topic is fundamental and closely related to other topics.  The validity of the random walk hypothesis is prerequisite for a lot of financial models  Allow to apply knowledge learn from class INTRODUCTION WHY KOREA MARKET  We are interested in emerging market  There…

• 1120 Words
• 19 Pages
Powerful Essays
• Powerful Essays

Hypothesis Testing I Pat Obi What is a “Hypothesis?” A statement or claim about the value of a population parameter: μ, σ2, p Pat Obi, Purdue University Calumet 2 Decision Rule 1. x  0 Z s n Compare calculated Z value to Z value from Table (critical Z value)  Reject H0 if calculated Z value lies in the rejection/significance region (i.e.  region) ALTERNATIVELY: 2. Compare p-value to   Reject H0 if p-value <  Pat Obi, Purdue University Calumet 3 Two-Tail Test   Ex: H0: 0…

• 2608 Words
• 30 Pages
Powerful Essays
• Good Essays

HYPOTHESIS TESTING WHAT IS THIS HYPOTHESIS???? • In simple words it means a mere assumption or supposition to be proved of disproved. • But, for a researcher it is a formal question that he intends to resolve. • Example: I assume that 1) under stress and anxiety a person goes into depression. 2) It leads to aggressive behaviour. Eg. : Students who get better counselling in a university will show a greater increase in creativity than students who were not counselled. • So, the hypothesis…

• 1393 Words
• 6 Pages
Good Essays
• Powerful Essays

Thiss thesis contains work on reinforced random walks, the reconstruction of random sceneriess observed along a random walk path, and the length of a longest increasing subsequencee in a random permutation. In this introduction, I will survey some of the work inn the area and describe my results. Furthermore I will explain how all three subjects fit intoo the framework of random walks in stochastic surroundings. Section 1 is dedicated to reinforcedd random walks. Section 2 describes scenery reconstruction…

• 6054 Words
• 25 Pages
Powerful Essays
• Powerful Essays

CHAPTER 8 Introduction to Hypothesis Testing 8.1 Inferential Statistics and Hypothesis Testing LEARNING OBJECTIVES 8.2 Four Steps to Hypothesis Testing After reading this chapter, you should be able to: 8.3 Hypothesis Testing and Sampling Distributions 8.4 Making a Decision: Types of Error 8.5 Testing a Research Hypothesis: Examples Using the z Test 8.6 Research in Focus: Directional Versus Nondirectional Tests 8.7 Measuring the Size…

• 4907 Words
• 20 Pages
Powerful Essays
• Good Essays

understanding of hypothesis testing. The textbook explained the aspects and steps of hypothesis testing in a legible fashion, while the video helped demonstrate a real-life application. I learned from the text that hypothesis testing is a “Procedure for deciding whether the outcome of a study (results from a sample) supports a particular theory or practical innovation (which is thought to apply to a population)” (Aron A., Aron, E., and Coups, 2011, p. 145). I also learned that hypothesis testing…

• 822 Words
• 4 Pages
Good Essays
• Powerful Essays

Hypothesis testing I Kevin Soo Outline • • • • Theory and the research process What is a hypothesis? Hypothesis testing Statistical models Theory and the research process Theory • A belief – Can be true or false – P (belief) • A proposed/possible explanation for something – ‘Some students do poorly at statistics because they have less exposure to mathematics’ – ‘Women don’t date me because I’m ugly’ – ‘Manchester United lost the Premier League because they struggled with injury…

• 1340 Words
• 6 Pages
Powerful Essays