centre for microdata methods and practice

ESRC centre

cemmap is an ESRC research centre

ESRC

Keep in touch

Subscribe to cemmap news

Mean Ratio Statistic for measuring predictability

Authors: Oliver Linton and Katja Smetanina
Date: 20 February 2015
Type: cemmap Working Paper, CWP08/15
DOI: 10.1920/wp.cem.2015.0815

Abstract

We propose an alternative Ratio Statistic for measuring predictability of stock prices. Our statistic is based on actual returns rather than logarithmic returns and is therefore better suited to capturing price predictability. It captures not only linear dependence in the same way as the variance ratio statistics of Lo and MacKinlay (1988) but also some nonlinear dependencies. We derive the asymptotic distribution of the statistics under the null hypothesis that simple gross returns are unpredictable after a constant mean adjustment. This represents a test of the weak form of the Efficient Market Hypothesis. We also consider the multivariate extension, in particular, we derive the restrictions implied by the EMH on multiperiod portfolio gross returns. We apply our methodology to test the gross return predictability of various financial series.

Download full version

Publications feeds

Subscribe to cemmap working papers via RSS

Search cemmap

Search by title, topic or name.

Contact cemmap

Centre for Microdata Methods and Practice

How to find us

Tel: +44 (0)20 7291 4800

E-mail us