Abstract
This article studied the Random Walk models introduced by Campbell et al.[2] for Malaysian stock market. The analysis is implemented under the possible drastic economics structural change using an iterative structural change test. After the break-date identification, the random walk hypothesis is tested by multiple variance ratios test in two separate periods. We further examined the serial correlations of return’s squared innovations for random walk classifications. Our empirical results evidenced the random walk type 3 dominating most of the Malaysian stock indices.
Highlights
Efficiency is often used to describe how all relevant information is impounded into the security prices of financial markets
This study evaluates the possible type of random walk in the Kuala Lumpur Stock Exchange (KLSE) and the nine sectoral indices before and after the periods of Asia financial crisis
This paper studies the classification of random walk processes in the Malaysian stock markets
Summary
Efficiency is often used to describe how all relevant information is impounded into the security prices of financial markets. If the stock prices is characterised by a mean reverting (trend stationary) process, there is a tendency for the price level to return to its trend path. This suggests that the presence of predictable component based on the historical information. The random walk 1(RW1) is the most restrictive model which requires independent and identically distributed (i.i.d) of the price changes. RW3 is further examines the possible of serial correlation in the squared increments which leads to the presence of conditional heteroscedasticity. Economists and econometricians have shown considerable interests to identify these processes which are important in their investments, implication of market efficiency and developing correct model specifications
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