Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 07-2001: THE RANDOM WALK OF STOCK PRICES: IMPLICATIONS OF RECENT NONPARA-METRIC TESTS

Christian M. Dahl and Steen Nielsen
Additional contact information
Christian M. Dahl: Purdue University, Postal: Economics Department, Purdue University,
Steen Nielsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: This paper applies six recently developed nonparametric tests of serial independence to monthly US stock returns. Findings of previous studies based on the BDS test are sup-ported since most of the new tests also reject the random walk hypothesis. Furthermore, power properties of the new tests are compared with those of the BDS test. The latter has much power against ARCH and GARCH alternatives whereas some of the more recent tests are superior against other alternatives. Finally, the power study of this paper shows, contrary to common belief, that ARCH and GARCH effects do not seem to explain rejec-tion of the random walk.

Keywords: Random walk; nonparametric tests; stock returns

JEL-codes: G12

21 pages, August 4, 2001

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