Variance-ratio Tests Robust to a Break in Drift

Authors

  • Yunmi Kim Department of Economics, University of Manitoba, Canada
  • Tae-Hwan Kim School of Economics, Yonsei University, Korea

Keywords:

Random walk hypothesis, Variance ratio tests, Spurious rejection, Exchange rates

Abstract

We consider a simple random walk process which exhibits a deterministic break in its drift term: for instance, from positive to negative. We demonstrate both theoretically and by simulation that when the standard variance ratio test is applied to this process, the phenomenon of spurious rejections of the random walk hypothesis can occur. We further propose a modi fied version of the variance ratio test to avoid such a problem. Finally, we discuss some implications of this finding on the previously revealed empirical evidence against the random walk hypothesis for exchange rates.

Author Biographies

  • Yunmi Kim, Department of Economics, University of Manitoba, Canada
    Professor, Department of Economics, University of Manitoba, Canada
  • Tae-Hwan Kim, School of Economics, Yonsei University, Korea

     

    Professor, School of Economics, Yonsei University, Korea

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Published

2010-05-22

Issue

Vol. 3 No. 3 (2010): Special Issue on Granger Econometrics and Statistical Modeling

Section

Special Issue on Granger Econometrics and Statistical Modeling

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How to Cite

Variance-ratio Tests Robust to a Break in Drift. (2010). European Journal of Pure and Applied Mathematics, 3(3), 502-518. https://www.ejpam.com/index.php/ejpam/article/view/799