A Comparative Study on the Efficiency of Korean Stock Markets: KOSPI and KOSDAQ

Abstract

Purpose - This study aims to examine and compare the weak-form efficiency of the KOSPI and KOSDAQ markets in Korea based upon the random walk process framework. Design/Methodology/Approach - This study uses multiple variance ratio tests with the purpose of testing the random walk process for daily returns of stocks to investigate the efficiency of stock markets in Korea. Chow-Denning and Richardson-Smith multiple variance ratio tests have been employed in order to find out the level of the efficiency of Korea’s stock markets. Findings - First, the daily return of both market indexes did not follow the random walk process for the sampling period, indicating that the Korean stock market indexes are not weak-form efficient. Second, all the individual stocks used for the analysis are shown to be inefficient in the weak form. Only three sample stocks in KOSPI market out of ten stocks accept the null hypothesis under the heteroscedasticity assumption, but the null hypothesis in these stocks is rejected under the homoscedasticity assumption. Research Implications - This study suggests that under the random walk hypothesis framework, the market index and individual stocks in Korean stock market show the informational inefficiency in a weak form. Accordingly, it seems that domestic and foreign investors may still be able to get the yield better than market average, or market index, in the Korea’s stock markets including KOSDAQ market by doing fundamental and technical analysis on the stock markets.