FIN-01-059

On the Asymptotic Power of the Variance Ratio Test

December 2001

Rohit S. Deo and Matthew Richardson

ABSTRACT

The variance ratio test statistic, which is based on k-period differences of the data, is commonly used in empirical finance and economics to test the random walk hypothesis. We obtain the asymptotic power function of the variance ratio test statistic when the differencing period k is increasing with the sample size n such that k/n-->d >0. We show that the test is inconsistent against a variety of mean reverting alternatives, confirm the result in simulations, and then characterize the functional form of the asymptotic power in terms of δ and these alternatives.

Rohit S. Deo
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0469
Fax: (212) 995-4003
Email: rdeo@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~rdeo

Matthew Richardson
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Fax: (212) 995-4233
Email: mrichard@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~mrichard

To download a copy of this paper click here
To request a copy of this paper click here

The Finance Department Working Paper Series has been generously sponsored by