List of Figures xiii List of Tables xv Preface xix1 Introduction 3    1.1 Organization of the Book 4    1.2 Useful Background 6       1.2.1 Mathematics Background 6       1.2.2 Probability and Statistics Background 6       1.2.

3 Finance Theory Background 7    1.3 Notation 8    1.4 Prices, Returns, and Compounding 9       1.4.1 Definitions and Conventions 9       1.4.2 The Marginal, Conditional, and Joint Distribution of Returns 13    1.5 Market Efficiency 20       1.

5.1 Efficient Markets and the Law of Iterated Expectations 22       1.5.2 Is Market Efficiency Testable? 242 The Predictability of Asset Returns 27    2.1 The Random Walk Hypotheses 28       2.1.1 The Random Walk 1: IID Increments 31       2.1.

2 The Random Walk 2: Independent Increments 32       2.1.3 The Random Walk 3: Uncorrelated Increments 33    2.2 Tests of Random Walk 1: IID Increments 33       2.2.1 Traditional Statistical Tests 33       2.2.2 Sequences and Reversals, and Runs 34    2.

3 Tests of Random Walk 2: Independent Increments 41       2.3.1 Filter Rules 42       2.3.2 Technical Analysis 43    2.4 Tests of Random Walk 3: Uncorrelated Increments 44       2.4.1 Autocorrelation Coefficients 44       2.

4.2 Portmanteau Statistics 47       2.4.3 Variance Ratios 48    2.5 Long-Horizon Returns 55       2.5.1 Problems with Long-Horizon Inferences 57    2.6 Tests For Long-Range Dependence 59       2.

6.1 Examples of Long-Range Dependence 59       2.6.2 The Hurst-Mandelbrot Rescaled Range Statistic 62    2.7 Unit Root Tests 64    2.8 Recent Empirical Evidence 65       2.8.1 Autocorrelations 66       2.

8.2 Variance Ratios 68       2.8.3 Cross-Autocorrelations and Lead-Lag Relations 74       2.8.4 Tests Using Long-Horizon Returns 78    2.9 Conclusion 803 Market Microstructure 83    3.1 Nonsynchronous Trading 84       3.

1.1 A Model of Nonsynchronous Trading 85       3.1.2 Extensions and Generalizations 98    3.2 The Bid-Ask Spread 99       3.2.1 Bid-Ask Bounce 101       3.2.

2 Components of the Bid-Ask Spread 103    3.3 Modeling Transactions Data 107       3.3.1 Motivation 108       3.3.2 Rounding and Barrier Models 114       3.3.3 The Ordered Probit Model 122    3.

4 Recent Empirical Findings 128       3.4.1 Nonsynchronous Trading 128       3.4.2 Estimating the Effective Bid-Ask Spread 134       3.4.3 Transactions Data 136    3.5 Conclusion 144    4.

1 Outline of an Event Study 150    4.2 An Example of an Event Study 152    4.3 Models fo.