Patterns in stock market movements tested as random number generators

Patterns in stock market movements tested as random number generators

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Article ID: iaor20131069
Volume: 227
Issue: 1
Start Page Number: 122
End Page Number: 132
Publication Date: May 2013
Journal: European Journal of Operational Research
Authors: ,
Keywords: market efficiency, random number generators, stock prices, correlation
Abstract:

This paper shows that tests of Random Number Generators (RNGs) may be used to test the Efficient Market Hypothesis (EMH). It uses the Overlapping Serial Test (OST), a standard test in RNG research, to detect anomalous patterns in the distribution of sequences of stock market movements up and down. Our results show that most stock markets exhibit idiosyncratic recurrent patterns, contrary to the efficient market hypothesis; also that OST detects a different kind of non‐randomness to standard econometric long‐ and short‐memory tests. Exposure of these anomalies should contribute to making markets more efficient.

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