It's most correctly pronounced with an initial "hall;" the word isn't derived from "hollow." instead, it's a corruption of "all hallows' even," literally meaning "the evening before all hallows' day."
The word "hallows" means "something sacred." In early Christianity, saints were "hallowed," or declared sacred, by the Church. All hallows' day was the day set aside for the reverence of the saints; today, it's called All Saints Day." "All hallows' even" originally meant "the evening before All Saints Day;" at the time, during the Middle Ages, All Saints Day, or All Hallows' Day, was November 1st, so October 31 was "All Hallows' Even."
The various traditions associated with Halloween, such as wearing costumes and masks, come from a much earlier Pagan tradition called Samhain.