STOCK MARKET PRICES DO NOT FOLLOW RANDOM WALKS: EVIDENCE FROM A SIMPLE SPECIFICATION TEST
Review of Financial Studies 1(1988), 41–66.
Andrew W. Lo and A. Craig MacKinlay
In this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at difference frequencies. The random walk model is strongly rejected for the entire sample period (1962–1985) and for all subperiods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are due largely to behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or time-varying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a mean-reverting model of asset prices.