A New Variance Ratio Test of Random Walk in Emerging Markets: A Revisit

Osamah M. Al-Khazali · David K. Ding · Chong Soo Pyun

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Stock Market Forecasting Methods

Abstract

Abstract Using a nonparametric variance ratio (VR) test, we revisit the empirical validity of the random walk hypothesis in eight emerging markets in the Middle East and North Africa (MENA). After correcting for measurement biases caused by thin and infrequent trading prevalent in nascent and small stock markets, we cannot reject the random walk hypothesis for the MENA markets. We conclude that a nonparametric VR test is appropriate for emerging stock markets, and argue that our findings can reconcile previously contradictory results regarding the efficiency of MENA markets.

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References

1988Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test 1996A test for independence based on the correlation dimension 1988Permanent and Temporary Components of Stock Prices 1986Does the Stock Market Rationally Reflect Fundamental Values?1991Chaos and Nonlinear Dynamics: Application to Financial Markets 1990The Dynamics of Stock Index and Stock Index Futures Returns 1989The size and power of the variance ratio test in finite samples 1993A simple multiple variance ratio test

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