We wish to thank two anonymous referees for many helpful comments and suggestions. The usual disclaimer applies.
On Testing the Random-Walk Hypothesis: A Model-Comparison Approach
Article first published online: 9 MAR 2005
Volume 35, Issue 3, pages 105–124, August 2000
How to Cite
Darrat, A. F. and Zhong, M. (2000), On Testing the Random-Walk Hypothesis: A Model-Comparison Approach. Financial Review, 35: 105–124. doi: 10.1111/j.1540-6288.2000.tb01423.x
- Issue published online: 9 MAR 2005
- Article first published online: 9 MAR 2005
- random walk hypothesis;
- Chinese stock market;
- artificial neural network
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 NAÏVE 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.