New procedures for testing whether stock price processes are martingales
Kei Takeuchi, Akimichi Takemura, Masayuki Kumon
TL;DR
This paper introduces new testing procedures using betting strategies to determine if stock prices follow a martingale process, revealing many stock prices do not conform to this assumption.
Contribution
It develops novel limit order betting-based tests for martingale properties in stock prices, especially utilizing high-frequency Markov strategies.
Findings
Many stock price processes are rejected as martingales.
Betting strategies can effectively test martingale hypotheses.
High-frequency Markov strategies reveal deviations from martingale behavior.
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.
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Taxonomy
TopicsFinancial Markets and Investment Strategies · Auction Theory and Applications · Monetary Policy and Economic Impact