New Procedures for Testing Whether Stock Price Processes are Martingales

Authors:
Kei Takeuchi;Akimichi Takemura;Masayuki Kumon
Affiliations:
Emeritus, Graduate School of Economics, University of Tokyo, Bunkyo-ku, Japan;Graduate School of Information Science and Technology, University of Tokyo, Bunkyo-ku, Japan 113-8656;Risk Analysis Research Center, Institute of Statistical Mathematics, Tachikawa-shi, Japan
Venue:
Computational Economics
Year:
2011

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Abstract

We propose procedures for testing whether stock price processes are martingales based on limit order type betting strategies. We first show that the null hypothesis of martingale property of a stock price process can be tested based on the capital process of a betting strategy. In particular with high frequency Markov type strategies we find that martingale null hypotheses are rejected for many stock price processes.