Abstract
By means of Monte Carlo experiments using the weighted bootstrap, we evaluate the size and power properties in small samples of Chow and Denning’s [1] multiple variance ratio test and the automatic variance ratio test of Choi [2]. Our results indicate that the weighted bootstrap tests exhibit desirable size properties and substantially higher power than corresponding conventional tests.
Highlights
The foundation of the efficient market hypothesis lies in the ground-breaking works of Bachelier [3], Cootner [4], Samuelson [5] and Fama [6]
To modify the size and power properties of multiple variance ratio (MVR) and automatic variance ratio (AVR) tests for smaller samples (N = 100, 500 and 1000), we propose the weighted bootstrap procedure
We find the size distortion to be less of a problem for MVR* and AVR* test statistics for a sample size of 1000
Summary
The foundation of the efficient market hypothesis lies in the ground-breaking works of Bachelier [3], Cootner [4], Samuelson [5] and Fama [6]. The study of the efficiency characteristics of the market impacts the regulatory framework, as well as the evolution of the market in terms of transparency and disclosures. It has policy implications which can help policy makers and regulators take steps towards financial innovations and economic development. The Lo and Mac Kinlay’s [7] individual variance ratio test and its multiple variance ratio variant, as proposed by Chow and Denning [1], are widely used to test the martingale behaviour of the time series
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