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On Testing the Random-Walk Hypothesis: A Model-Comparison Approach

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  • Darrat, Ali F
  • Zhong, Maosen

Abstract

The main intention of this paper is to investigate, with new daily data, whether prices in the two Chinese stock exchanges (Shanghai and Shenzhen) follow a random-walk process as required by market efficiency. We use two different approaches, the standard variance-ratio test of Lo and MacKinlay (1988) and a model-comparison test that compares the ex post forecasts from a NAIVE model with those obtained from several alternative models: ARIMA, GARCH and the Artificial Neural Network (ANN). To evaluate ex post forecasts, we utilize several procedures including RMSE, MAE, Theil's U, and encompassing tests. In contrast to the variance-ratio test, results from the model-comparison approach are quite decisive in rejecting the random-walk hypothesis in both Chinese stock markets. Moreover, our results provide strong support for the ANN as a potentially useful device for predicting stock prices in emerging markets. Copyright 2000 by MIT Press.

Suggested Citation

  • Darrat, Ali F & Zhong, Maosen, 2000. "On Testing the Random-Walk Hypothesis: A Model-Comparison Approach," The Financial Review, Eastern Finance Association, vol. 35(3), pages 105-124, August.
    • Handle: RePEc:bla:finrev:v:35:y:2000:i:3:p:105-24
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