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A Variance‐Ratio Test of the Random Walk Hypothesis for the New Zealand Share Market: 1980‐2001

A Variance‐Ratio Test of the Random Walk Hypothesis for the New Zealand Share Market: 1980‐2001 This paper examines the Random Walk Hypothesis (RWH) for aggregate New Zealand share market returns, as well as the CRSP NYSE‐AMEX (USA) index during the 1980‐2001 period. Using several indices, we rely on the variance‐ratio test and find evidence to support the rejection of the RWH with some evidence of a momentum effect. However, we find evidence to suggest the behaviour of share prices to be time‐dependent in New Zealand. For example, we find the indices tested were closer to random after the 1987 share market crash. Further analysis showed even stronger results for periods subsequent to the passage of the Companies Act 1993 and the Financial Reporting Act 1993. We also find evidence that indices based on large capitalisation stocks are more likely to follow a random walk compared to those based on smaller stocks. For the USA index, we find stronger evidence of random behaviour in our sample period compared to the earlier period examined by Lo and Mackinlay (1988) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

A Variance‐Ratio Test of the Random Walk Hypothesis for the New Zealand Share Market: 1980‐2001

Pacific Accounting Review , Volume 17 (2): 19 – Jul 1, 2005

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Publisher
Emerald Publishing
Copyright
Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
ISSN
0114-0582
DOI
10.1108/01140580510818558
Publisher site
See Article on Publisher Site

Abstract

This paper examines the Random Walk Hypothesis (RWH) for aggregate New Zealand share market returns, as well as the CRSP NYSE‐AMEX (USA) index during the 1980‐2001 period. Using several indices, we rely on the variance‐ratio test and find evidence to support the rejection of the RWH with some evidence of a momentum effect. However, we find evidence to suggest the behaviour of share prices to be time‐dependent in New Zealand. For example, we find the indices tested were closer to random after the 1987 share market crash. Further analysis showed even stronger results for periods subsequent to the passage of the Companies Act 1993 and the Financial Reporting Act 1993. We also find evidence that indices based on large capitalisation stocks are more likely to follow a random walk compared to those based on smaller stocks. For the USA index, we find stronger evidence of random behaviour in our sample period compared to the earlier period examined by Lo and Mackinlay (1988)

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Jul 1, 2005

Keywords: New Zealand; United States; Stock markets; Financial reporting

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