Browse > Article
http://dx.doi.org/10.13106/jafeb.2020.vol7.no10.523

The Existence of Random Walk in the Philippine Stock Market: Evidence from Unit Root and Variance-Ratio Tests  

CAMBA, Abraham C. Jr. (Department of Economics, College of Social Sciences and Development, Polytechnic University of the Philippines)
CAMBA, Aileen L. (Department of Economics, College of Social Sciences and Development, Polytechnic University of the Philippines)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.10, 2020 , pp. 523-530 More about this Journal
Abstract
The efficient market hypothesis explains the random walk hypothesis suggesting that stock prices are independent of each other, hence, it is impossible to earn abnormal profits. The positive effect of a well-functioning and highly efficient stock market on the performance of an economy motivated the Philippine Stock Exchange to pursue massive modernization initiatives. This research provides evidence of the existence of random walk in the Philippine stock market employing the Augmented Dickey-Fuller (1981) and Phillips-Perron (1988) unit root tests, the Lo-MacKinlay's (1988) conventional variance ratio test, and Chow-Denning's (1993) simple multiple variance ratio test. Results of the ADF and PP unit root tests confirm the necessary condition for a random walk. The Chow-Denning (1993) maximum /z/ statistic and the Wald test statistic as in Richardson and Smith (1991) for the joint hypotheses and the Lo and MacKinlay (1988) individual statistics variance ratio test generally accepted the null hypothesis of a random walk. That is, the unit root and variance ratio tests consistently indicate that the null hypothesis of random walk cannot be rejected. The existence of a random walk in weak-form efficiency can be attributed to market liquidity as a result of continuous development and modernization of the Philippine equity market.
Keywords
Chow-Denning Maximum Statistics; Random Walk; Unit Root; Variance Ratio Test; Wald Test Statistic;
Citations & Related Records
Times Cited By KSCI : 7  (Citation Analysis)
연도 인용수 순위
1 Rufino, C. (2013). Random walks in the different sub-markets of the Philippine Stock Exchange amid modernization. Philippine Review of Economics, 19(1), 57-82.
2 Smith, G. (2007). Random walks in Middle Eastern stock markets. Applied Financial Economics, 17(7), 587-596. https://doi.org/10.1080/09603100600911200   DOI
3 Wang, N., Chen, Y. B., & Wang, B. (2018). Normality of the Stock Index Futures of China. Journal of Mathematical Finance, 8, 86-101. https://doi.org/10.4236/jmf.2018.81007   DOI
4 Worthington, A. C., & Higgs, H. (2006). Weak-form market efficiency in Asian emerging and developed equity markets: Comparative tests of random walk behavior. Accounting Research Journal, 19(1), 54-63.
5 Lean, H. H., Mishra, V., & Smyth, R. (2015). The Relevance of Heteroskedasticity and Structural Breaks When Testing for a Random Walk With High-Frequency Financial Data: Evidence from ASEAN Stock Markets. In: Gregorious, G (eds). The Handbook of High Frequency Trading. Singapore: Elsevier. https://doi.org/10.1016/B978-0-12-802205-4.00004-X
6 Lima, E., & Tabak, B. (2004). Tests of the random walk hypothesis for equity markets: evidence from China, Hong Kong and Singapore. Applied Economics Letters, 11(4), 255-258. https://doi.org/10.1080/13504850410001674911   DOI
7 Lo, A. W., & MacKinlay, A. C. (1988). Stock market prices do not follow random walk: Evidence from a simple specification test. The Review of Financial Studies, 1, 41-66. https://doi.org/10.1093/rfs/1.1.41   DOI
8 Fong, W. M., Koh, B., & Ouliaris, S. (1997). Joint Variance Ratio Tests of the Martingale Hypothesis for Exchange Rates. Journal of Business and Economic Statistics, 1(1), 51-59.
9 Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(1), 1057-1072.   DOI
10 Dupernex, S. (2007). Why Might Share Prices Follow A Random Walk? Student Economic Review, 21, 167-179.
11 Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrica, 75(1), 335-346.   DOI
12 Lock, D. B. (2007). The Taiwan stock market does follow a random walk. Economics Bulletin, 7(3), 1-8. Retrieved February 11, 2020, from https://core.ac.uk/download/pdf/6310232.pdf
13 Mehmood, M. S., Mehmood, A., & Mujtaba, B. G. (2012). Stock Market Prices Follow the Random Walks: Evidence from the Efficiency of Karachi Stock Exchange. European Journal of Economics, Finance and Administrative Sciences, 51, 71-80.
14 Omar, M. M., Hussain, H., Bhatti, G. A., & Altaf, M. (2013). Testing of random walks in Karachi stock exchange. Finance Management, 54, 12293-12299.
15 Rehman, S., Kashif, M., Chhapra, I. U., & Rehan, R. (2018). Are Stock Prices a Random Walk? An Empirical Evidence of Asian Stock Market. Etikonomi: Jurnal Ekonomi, 17(2), 237-252. http://dx.doi.org/10.15408/etk.v17i2.7102   DOI
16 Richardson, M., & Smith, T. (1991). Tests of Financial Models in the Presence of Overlapping Observations. The Review of Financial Studies, 4(2), 227-254.   DOI
17 Kim, J., & Shamsuddin, A. (2008). Are Asian stock markets efficient? Evidence from new multiple variance ratio tests. Journal of Empirical Finance, 15, 518-532. https://doi.org/10.1016/j.jempfin.2007.07.001   DOI
18 Go, Y., & Lau, W. (2014). Asymmetric Information Spillovers between Trading Volume and Price Changes in Malaysian Futures Market. Journal of Asian Finance, Economics and Business, 1(3), 5-16. https://doi.org/10.13106/jafeb.2014.vol1.no3.5   DOI
19 Hamid, K., Suleman, T. M., Shah, A. Z. S., & Akash, I. S. R. (2010). Testing the Weak form of Efficient Market Hypothesis: Empirical Evidence from Asia-Pacific Markets. International Research Journal of Finance and Economics, 58, 121-133. http://dx.doi.org/10.2139/ssrn.2912908
20 Hoque, H., Kim, J., & Pyun, C. (2006). A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets. International Review of Economics & Finance, 16(4), 488-502. https://doi.org/10.1016/j.iref.2006.01.001   DOI
21 Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54(1-3), 159-178. https://doi.10.1016/0304-4076(92)90104   DOI
22 Lean, H. H., & Smyth, R. (2007). Do Asian Stock Markets Follow a Random Walk? Evidence from LM Unit Root Tests with One and Two Structural Breaks. Review of Pacific Basin Financial Markets and Policies, 10(1), 15-31. https://doi.org/10.1142/S0219091507000933   DOI
23 Chang, K., & Ting, K. (2000). A Variance Ratio Test of the Random Walk Hypothesis for Taiwan's Stock Market. Applied Financial Economics, 10, 525-32. https://doi.org/10.1080/096031000416406   DOI
24 Al-Homaidi, E., Tabash, M., Al-Ahdal, W., Farman, N., & Khan, S. (2019). The Liquidity of Indian Firms: Empirical Evidence of 2154 Firms. Journal of Asian Finance, Economics and Business, 7(1), 19-27. https://doi.org/10.13106/jafeb.2020.vol7.no1.19   DOI
25 Brealey, R. A., Myers, S. C., & Allen, F. (2005). Corporate Finance (8th Ed.). New York, NY: McGraw-Hill Irwin.
26 Camba, Jr. A. C., & Camba, A. L. (2020). The Dynamic Relationship of Domestic Credit and Stock Market Liquidity on the Economic Growth of the Philippines. Journal of Asian Finance, Economics and Business, 7(1), 37-46. https://doi:10.13106/jafeb.2020.vol7.no1.37   DOI
27 Charles, A., & Darne, O. (2009). Variance ratio tests of random walk: An overview. Journal of Economic Surveys, 23(3), 503-527.   DOI
28 Chavali, K., Alam, M., & Rosario, S. (2020). Stock Market Response to Elections: An Event Study Method. Journal of Asian Finance, Economics and Business, 7(5), 009-018. https://doi.org/10.13106/jafeb.2020.vol7.no5.009   DOI
29 Chen, J. (2008). Variance Ratio Tests of Random Walk Hypothesis of the Euro Exchange Rate. International Business & Economics Research Journal, 7(12), 97-106. https://doi.org/10.19030/iber.v7i12.3318
30 Chow, K. V., & Denning, K. C. (1993). A Simple Multiple Variance Ratio Test. Journal of Econometrics, 58, 385-401. https://doi.org/10.1016/0304-4076(93)90051-6   DOI
31 Cuthbertson, K., & Nitzche, D. (2004). Quantitative Financial Economics (2nd Ed.). Chichester, UK: John Wiley and Sons.