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Are Stock Returns Predictable? A Test Using Markov Chains

1991; Wiley; Volume: 46; Issue: 1 Linguagem: Inglês

10.2307/2328695

1540-6261

Grant McQueen, Steven Thorley,

Complex Systems and Time Series Analysis

The Journal of FinanceVolume 46, Issue 1 p. 239-263 Article Are Stock Returns Predictable? A Test Using Markov Chains GRANT MCQUEEN, GRANT MCQUEENSearch for more papers by this authorSTEVEN THORLEY, STEVEN THORLEYMcQueen is with the Marriott School of Management, Institute of Business Management, Brigham Young University. Thorley is with the Department of Finance, Graduate School of Business Administration, University of Washington. We are grateful to Haim Levy, J. Michael Pinegar, V. Vance Roley, Andrew Siegel, Simon Wheatley, an anonymous referee, the editor (René Stulz), and seminar participants at the University of Washington and Brigham Young University.Search for more papers by this author GRANT MCQUEEN, GRANT MCQUEENSearch for more papers by this authorSTEVEN THORLEY, STEVEN THORLEYMcQueen is with the Marriott School of Management, Institute of Business Management, Brigham Young University. Thorley is with the Department of Finance, Graduate School of Business Administration, University of Washington. We are grateful to Haim Levy, J. Michael Pinegar, V. Vance Roley, Andrew Siegel, Simon Wheatley, an anonymous referee, the editor (René Stulz), and seminar participants at the University of Washington and Brigham Young University.Search for more papers by this author First published: March 1991 https://doi.org/10.1111/j.1540-6261.1991.tb03751.xCitations: 45 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat 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. REFERENCES Amemiya, T., 1985, Advanced Econometrics, Chap. 9, (Harvard University Press, Cambridge, MA). Anderson, T. W., 1984, An Introduction to Multivariate Statistical Analysis, 2nd Edition, Chap. 4, (John Wiley & Sons, Somerset, NJ). Berndt, E. R. and N. E. 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