The European Journal of Finance 9, 290-300 (June 2003) Variance ratio tests of the random walk hypothesis for European emerging stock markets GRAHAM SMITH* and HYUN-JUNG RYOO Department of Economics, School of Oriental & African Studies, University of London, Thornhaugh Street, Russell Square, London WC1H0XG, UK '
[email protected] The hypothesis that stock market price indices follow a random walk is tested for five European emerging markets, Greece, Hungary, Poland, Portugal and Turkey, using the multiple variance ratio test. In four of the markets, the random walk hypothesis is rejected because of autocorrelation in returns. For the Istanbul market, which had markedly higher turnover than the other markets in the 1990s, the stock price index follows a random walk. This contrasts with the results of earlier research, carried out for periods of lower turnover, which rejected the random walk hypothesis. Keywords: emerging markets, random walk hypothesis, stock prices, variance ratio tests 1. INTRODUCTION Equity markets play a central role in the pricing and allocation of capital and the pricing of risk and their efficiency can be assessed by examining the behaviour of equity prices. In markets that are weak-form efficient, equity prices completely reflect all of the information contained in the past history of prices and do not convey information about future changes in prices. If they did convey such infor- mation there would be profit-making opportunities for Investors and so markets would be imperfect. A widely used test of weak-form efficiency is to see whether equity prices follow a random walk - a test that can be used with individual equities or with stock price indices.