Evolving efficiency of the Saudi Arabian stock market via Shannon entropy approach: a study on sector-based data

Abstract

This paper attempts to analyse the time-varying degrees of weak-for efficiency (WFE) of the Saudi stock market (SSM) using sector-based data. The empirical approach is based on the modified Shannon entropy (SE) and the symbolic time series analysis for a dataset covering 15 sectors for the period (January 2007 to April 2012). Our results reveal significant departure from efficiency but the efficiency degree evolves over time. Also, we show the existence of structural breaks in the time-varying measure of efficiency indicating that the occurrence of extreme events strongly impacts the efficiency behaviour. Furthermore, we provide evidence that Shariah-compliant stocks behave differently from other firms in terms of the degree of WFE and its path over time. Overall, our findings provide several implications for portfolio managers and Saudi policy makers.