Abstract
Efficient Market Hypothesis (EMH) has attracted a considerable number of studies in empirical finance, particularly in determining the market efficiency of an emerging financial market that is Dhaka Stock Exchange (DSE). Conflicting and inconclusive outcomes have been generated by various existing studies in EMH. In addition, efficiency tests in the emerging financial markets are rarely definitive in reaching a conclusion about the issue. This paper recommend a paradigm of non-parametric tests of market efficiency for an emerging stock market, that is DSE, consisting of non-parametric test which is autocorrelation function tests (ACF), to establish a more definitive conclusion about EMH in emerging financial markets. The result of this research using Dhaka Stock Exchange General Index (DGEN) demonstrates that a positive autocorrelation on Dhaka Stock Exchange returns exists particularly in the period of 2001-2013 and DSE doesn't hold weak form of efficiency and not following the Random walk model. The inefficiency of the Dhaka Stock Exchange follows on from the violation of the necessary conditions for an efficient market with a developed financial system and also implies financial markets and institutional imperfections.
Highlights
The most divisive issue in finance is possibly whether the financial market is efficient in allocating or using economic resources and information or not
Other financial theory issues such as volatility, predictability, speculation and anomalies are related to the efficiency issue and are all interdependent (Islam and Oh 2003[1]; Mills 1999[2]; Cuthbertson 1996[3]), and empirical evidence provided by existing numerous tests of these issues (see Bollerslev and Hodrick (1999)[4],Pesaran and Wickens (1999)[5]) is used in supporting or rejecting efficiency in the financial market
Before we examine the efficiency issues of Dhaka Stock Exchange (DSE), we need to revisit the definition of efficient market hypothesis (EMH)
Summary
The most divisive issue in finance is possibly whether the financial market is efficient in allocating or using economic resources and information or not. The limitation of the existing empirical tests of the efficiency issue in the financial market (Efficient Market Hypothesis (EMH)) has generated contradictory and questionable outcomes. The major challenges to EMH are mainly in the following forms: empirical tests for EMH show no evidence in favour of EMH, the existence of the limitations of the statistical and mathematical models for EMH, the evidence of the excess volatility mean reversion predictability, the existence of bubbles, and non-linear complex dynamics and turmoil in the stock market. The tests of EMH relate to the issues of predictability, anomaly, seasonality, volatility and the existence of bubbles Studies of all these issues enable an analyst to draw a conclusion about the efficiency of a financial market of a country
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