Two essays in finance: A test of the random walk hypothesis. An examination of covered call strategies.

摘要

The Random Walk Hypothesis (RWH) when applied to stock prices makes strong statements about such things as serial correlation and momentum in stock returns and about the information carried in the path of the stock price. Its significance to Finance has motivated many tests of the RWH. This paper, using data from 1963--1997, tests the RWH and then evaluates those tests using simulated data. We find that the data reject the RWH and that rejections are stronger using NASDAQ firms than they are with NYSE/AMEX firms. The time series properties of the rejection of the RWH suggest that recently prices more closely conform to the properties of a random walk than they did in the more distant past. The simulation results show that if the true underlying price process is a random walk, market imperfections such as price discreteness are sufficient to reject the random walk hypothesis. The time series properties of the rejection of the RWH are consistent with a narrowing of the bid ask spread through time.; Covered call strategies are touted as win-win strategies. If share prices rise strongly then shares are sold and the gain is locked in. If share prices are flat or fall then the premiums from the sale of the call options act as additional income to supplement the poor performance of the stocks. The last two chapters in this paper compare covered call strategies to a simple buy and hold strategy, using data from 1989--1998. The results show that the buy and hold strategy out-performs the covered call strategy over this period even after adjusting for systematic risk and co-skewness with the market. Empirical comparisons of buy and hold and covered call strategies are period dependent and difficult to generalize as market performance plays a key role. Bootstrapping and simulation provide control over market returns. Both simulated and empirical analyses consider transactions costs and taxes as well as account for the different risk assumed under each strategy.