Do Stock Prices Follow Random Walks: An Analysis of the Tokyo Stock Exchange

The purpose of this study is to evaluate the random walk hypothesis in the context of stocks traded on the Tokyo Stock Exchange (TSE). Using a volatility based specification test developed by Lo and McKinlay (1988), we conclude that the stock prices for small firms do not follow a random walk. To determine if this deviation from random walks is associated with long-range dependence, we estimate and analyze the modified "range over standard deviation" statistic constructed by Lo (1991). The results of this analysis suggest that short-term memory is most likely the reason for the observed structure of returns.