Abstract
We investigated the weak-form market efficiency of nine daily sectoral indices of Malaysian stock market between 1996 and 2006. The structural break unit root tests evidenced most of the price indices characterized by mean-reverting process that violated the random walk process. These empirical results were in sharp contrast with the traditional unit-root test which ignored the economic crisis and currency control. Our findings concluded that the Malaysian sectoral stock markets were weak-form inefficient (except the property index) under the structural change.
Highlights
The early study by French economist Louis Bachelier[1] suggested that the presence of random walk theory in the French commodity markets where the random nature of the stock prices is unforecastable
Paul Samuelson[2] has conducted similar study of the random walk hypothesis (RWH) to financial markets and concluded that price changes must be unpredictable if they are properly anticipated by all the market participants
If stock price failed to reject the random walk hypothesis (RWH), this implies that the future returns are unpredictable by using information on past returns
Summary
The early study by French economist Louis Bachelier[1] suggested that the presence of random walk theory in the French commodity markets where the random nature of the stock prices is unforecastable. The randomness of price changes are the results of instantaneous responses from an enormous investors who seeking for greater wealth Investors incorporated their available (even a tiny piece of information) information into the market price and caused rapid prices adjustment. If the stock prices is characterized by a mean reverting (trend stationary) process, there is a tendency for the price level to return to its trend path. This suggested that the presence of predictable component based on the historical information
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