The Analysis of Shares' Price predictability by Variance Ratio Tests and Random Walk Hypothesis in Tehran Stock Exchange

Document Type : Research Paper


1 Associate Prof., Dep. of Economics, Bu-Ali Sina University, Hamedan, Iran

2 Associate Prof., Faculty of Management, Tehran University, Tehran, Iran

3 M.A. in Economics, Bu-Ali Sina University, Hamedan, Iran


Abstract: One of the possible scales of stock market development is evaluating its efficiency. If stock markets are efficient, the current market price accurately reflects the fundamental or intrinsic valueof the asset. The examination of the behavior of asset returns and the predictability of their prices, in the context of a weak form efficient market, is of interest to both academics and practitioners. In this study, the efficient market hypothesis and especially the random walk hypothesis in Tehran stock market has been investigated using recently developed variance ratio tests, in addition to Lo-MacKinlay variance ratio test. For this purpose the random walk behavior has been studied in three indexes of TEPIX, TEDPIX, and 50 most traded at period 80-89. According to the results of this study, following the data from random walk process in this time interval in Tehran stock market is not approved.


Arouri, M., Jawadi .F, Nguyen .D. (2010). The Dynamics of emerging stock markets. empirical assessments and implications. Springer.
Belaire-Franch, G., Opong, K.K. (2005a). A variance ratio test of the behaviour of some FTSE equity indices using ranks and signs. Review of Quantitative Finance and Accounting, 24, 93–107.
Belaire-Franch, G., Opong, K.K. (2005b). Some evidence of random walk behavior of Euro exchange rates using ranks and signs. Journal of Banking and Finance, 29, 1631–1643.
Campbell, B., Dufour, J.-M. (1997). Exact nonparametric tests of orthogonality and random walk in the presence of a drift parameter. International Economic Review, 38, 151–173.
Chow, K. V., Denning, K. C. (1993). A simple multiple variance ratio test. Journal of Econometrics, 58(3), 385–401.
D’Ambrosio, C. (1980). Random walk and the stock exchange of Singapore. Financial Review, 15, 1–12.
Davidson, R., & Flachaire, E., 2000. “The wild bootstrap, tamed  at  last”. Journal of Econometrics, vol. 146, 162-9.
Fama, E. (1965). The Behaviour of Stock Market Prices. Journal of Business, 38, 34–105.
Hoque, H., Kim, J.H., Pyun, C.S. (2007). A comparison of variance ratio tests of random walk: a case of Asian emerging stock markets. International Review of Economics and Finance, 16, 488–502.
Huber, P. (1997). Stock market returns in thin markets: Evidence from the Vienna Stock Exchange. Applied Financial Economics, 7, 493–498.
Kendall, M. G. (1953). The Analysis of Economic Time Series. Journal of the Royal Statistical Society.
Kim, J. H. (2006). Wild bootstrapping variance ratio tests. Economics Letters, 92, 38–43.
Kim, J. H., Shamsuddin, A. (2008). Are asian stock markets efficient? Evidence from new multiple variance ratio tests. Journal of Empirical Finance, 15, 518–532.
Lo, A. W., MacKinlay, A. C. (1988). Stock market prices do not follow random walks: Evidence from a simple specification test. Review of Financial Studies, 1(1), 41–66.
Luger, R. (2003). Exact non-parametric tests for a random walk with unknown drift under conditional heteroscedasticity. Journal of Econometrics ,115, 259–276.
Richardson, M. (1993). Temporary components of stock prices: a skeptic's view. Journal of Business & Economic Statistics, 11, 199–207.
Roberts, .H. (1967). Statistical versus clinical prediction of the stock market. CRSP University of Chicago.
Van der Hart, J., Stagter, E., & van Dijk, D. (2003). Stock selection strategies in emerging markets. Journal of Empirical Finance, 10, 105–132.
Wright .J. H. (2000). Alternative variance-ratio tests using ranks and signs. Journal of Business & Economic Statistics, 18(1), 1–9.