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Are Stock Returns Predictable? A Test Using Markov Chains

Are Stock Returns Predictable? A Test Using Markov Chains ABSTRACT This paper uses a Markov chain model to test the random walk hypothesis of stock prices. Given a time series of returns, a Markov chain is defined by letting one state represent high returns and the other represent low returns. The random walk hypothesis restricts the transition probabilities of the Markov chain to be equal irrespective of the prior years. Annual real returns are shown to exhibit significant nonrandom walk behavior in the sense that low (high) returns tend to follow runs of high (low) returns in the postwar period. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Are Stock Returns Predictable? A Test Using Markov Chains

MCQUEEN, GRANT; THORLEY, STEVEN
The Journal of Finance , Volume 46 (1) – Mar 1, 1991
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References (35)

Publisher
Wiley
Copyright
1991 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1991.tb03751.x
Publisher site
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Abstract

ABSTRACT This paper uses a Markov chain model to test the random walk hypothesis of stock prices. Given a time series of returns, a Markov chain is defined by letting one state represent high returns and the other represent low returns. The random walk hypothesis restricts the transition probabilities of the Markov chain to be equal irrespective of the prior years. Annual real returns are shown to exhibit significant nonrandom walk behavior in the sense that low (high) returns tend to follow runs of high (low) returns in the postwar period.

Journal

The Journal of Finance – Wiley

Published: Mar 1, 1991

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