Abstract
A major issue in financial economics is the behavior of stock market returns over long horizons. This paper provides an empirical investigation of the random walk hypothesis in the MENA equity markets. We use the variance ratio tests developed by Wright (2000), Kim and Wang and Chow Denning (1993) to test for the weak form market efficiency. Then, we use the unit root tests proposed by Saikkonen and LA¼tkepohl (2002) and Lanne et al . (2002), which allow for a level shift in the data generating process. Our results confirm the stationarity of the MENA equity markets returns in the presence of structural breaks, with the breaks happening mostly during the 2008 and 2009 periods. Further, the findings from our sub-samples indicate that the results from the last sub-periods support the belief that these markets may have been approaching a state of being fairly weak-form efficient, which reflects the future prospects of the MENA countries.
Highlights
Testing for efficient market hypothesis has important implications for trading strategies and random walk property of asset returns
The results of the Wang and Kim (2003) tests show rejections of the random walk hypothesis for almost all the Middle East and North African (MENA) equity markets, as the p-values are less than the 1%, except for Jordan and Tunisia
This paper investigates whether a group of MENA equity markets returns follow a martingale process and whether a structural break like the financial crisis of 2008 had any impact on the efficient market hypothesis of these markets
Summary
Testing for efficient market hypothesis has important implications for trading strategies and random walk property of asset returns. Lagoarde-Segot and Lucey (2008) investigated the informational efficiency in a set of seven emerging MENA stock markets They analyzed the impact of market development, corporate governance and economic liberalization on the latter using a multinomial ordered logistic regression. Bollerslev and Mikkelsen (1996) presented results showing that it may be important to model the long memory volatility correctly when pricing contracts with long maturity, such as index options and futures We conclude that this set of markets, even with their different institutions and information flows than the developed market, present similar market structure to the preponderance of studies employing other developed markets data.
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