EFFICIENCY OF THE STOCK MARKETS AFTER THE 2008 FINANCIAL CRISIS: EVIDENCE FROM THE FOUR ASIAN DRAGONS

Abstract

The efficient market hypothesis (EMH) claims that in an efficient market where prices of securities fully reflect their intrinsic values, it is not possible to make excess returns with any investment tools or strategies. A natural question then to ask is: has the EMH claim become obsolete or irrelevant after the 2008 financial crisis? To address this issue, this study employs three popular technical trading rules to investigate, using the 10-year daily price data after the crisis, the efficiency of the stock markets of Hong Kong, Korea, Singapore, and Taiwan — jointly known as the four Asian dragons. Our rationale for using these rules is that if they are effective in exploiting profit opportunities, then these markets are not efficient. Our results show that, with a few minor exceptions in Hong Kong and Singapore, none of the three rules performs better than a buy-andhold strategy. Given these results, we conclude that the EMH claim is still alive and well in these four stock markets. In practice, many corporations operating in the four Asian Dragons typically turn to banks for financing. Hence, an important implication of this study is that, given the efficiency of the four markets, these corporations should instead step up the use of the stock markets to raise the needed funds, which is more likely to lower their cost of financing.