Advances in Decision Sciences
Volume 2006 (2006), Issue 2, Pages Article 12314, 21 p.
doi:10.1155/JAMDS/2006/12314
New variance ratio tests to identify random walk from the general mean reversion model
Kin Lam1
, May Chun Mei Wong2
and Wing-Keung Wong3
1Department of Finance \& Decision Sciences, Hong Kong Baptist University, Hong Kong
2Dental Public Health, The University of Hong Kong, Hong Kong
3Department of Economics, Faculty of Arts \& Social Sciences, National University of Singapore, 1 Arts Link, 117570, Singapore
Abstract
We develop some properties on the autocorrelation of the k-period returns for the general mean reversion (GMR) process in which the stationary component is not restricted to the AR(1) process but takes the form of a general ARMA process. We then derive some properties of the GMR process and three new nonparametric tests comparing the relative variability of returns over different horizons to validate the GMR process as an alternative to random walk. We further examine the asymptotic properties of these tests which can then be applied to identify random walk models from the GMR processes.