TITLE:
A Simple Return Generating Model in Discrete Time: Implications and Potential Applications for Market Efficiency Testing and Technical Analysis
AUTHORS:
Alexandros E. Milionis
KEYWORDS:
Evolving Efficiency, Market Efficiency Testing, Random Walks, Return Generating Model, Return Predictability, Technical Analysis
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.4,
April
22,
2019
ABSTRACT: A linear return generating model is introduced. This
model is a generalization in discrete time of the differential equation
describing dynamical systems in continuous time. The model is useful in its own
right, as it provides a simplified, yet credible, quantitative description of
the reality. Further, the model is used as a tool for a theoretical study of
market efficiency testing. This is obtained by modelling certain market
conditions under which new information is
released and reflected in asset prices on the one hand, and, on the other
hand, by recording what established econometric testing approaches conclude,
about the hypothesis of market efficiency. Amongst others it is argued that,
contrary to the general belief, theoretically a random walk in asset prices,
under certain conditions, could be associated with profoundly inefficient
markets. Furthermore, an enhancement of the battery of statistical tests for
market efficiency is proposed by the potential application of specific forms of
the suggested linear dynamic model and the possible advantages over the
existing techniques are explained. Finally, market efficiency is discussed in
its relation to Technical Analysis.