IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789812702852_0004.html
   My bibliography  Save this book chapter

Excursions in the Martingale Hypothesis

In: Stochastic Processes And Applications To Mathematical Finance

Author

Listed:
  • Paolo Guasoni

    (Boston University, Dept. of Mathematics and Statistics, 111 Cummington St., Boston, MA 02215, USA and University of Pisa, Dipartimento di Matematica, Via Buonarroti, 2, 56127 Pisa, Italy)

Abstract

We introduce a methodology for testing the martingale-hypothesis from time-series observations of a continuous asset process. Fixing the risk premium, the tests considered return the significance level at which a sample path belongs to a continuous martingale. Conversely, if the martingale hypothesis is assumed, we obtain the significance level of the particular risk premium. Using a time-change technique, we present tests which are independent of the continuous process driving the price process. This means that results are robust to any form of heteroskedasticity in asset returns. We show that the power against mean-reverting alternatives is higher than that of variance-ratio tests, at least for levels below 20%. We address estimation issues from discretely sampled data, and apply the tests to US stock indices. We conclude that for the S&P 500 index, the martingale hypothesis cannot be rejected at 15% level for a range of equity premia between 3.3% and 6.5%.

Suggested Citation

  • Paolo Guasoni, 2004. "Excursions in the Martingale Hypothesis," World Scientific Book Chapters, in: Jiro Akahori & Shigeyoshi Ogawa & Shinzo Watanabe (ed.), Stochastic Processes And Applications To Mathematical Finance, chapter 4, pages 73-95, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812702852_0004
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789812702852_0004
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789812702852_0004
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789812702852_0004. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.