Research Added

Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test

• We have rejected the random walk hypothesis for weekly stock market returns by using a simple volatility-based specification test . These rejections cannot be explained completely by infrequent trading or time-varying volatlities. The patterns of rejections indicate that the stationary mean-reverting models of Shiller and Perron (1985), Summers (1986), Poterba and Summers (1988), and Fama and French (1988) cannot account for the departures of weekly returns from the random walk.
• Our results do, however, impose restrictions upon the set of plausible economic models for asset pricing; any structural paradigm of rational price formation must now be able to explain this pattern of serial correlation present in weekly data.