Abstract
Since the birth of the financial literature until the 1970s, the efficient market hypothesis has been regarded as a central hypothesis. In the mid-1970s, there were theoretical and empirical evidence stating that the EMH seems untouchable. However, recently there has been an emergence of arguments doubting the EMH. The EMH implicitly indicates that stock prices can follow a random walk. Currently, financial theory has shown that stock prices do not follow a random walk. In this regard, our empirical study rejected the hypothesis of a random walk for 27 indices out of 28 studied. We confirm that the studied indices time series do not follow a random walk, and therefore we reject the financial markets efficiency hypothesis in its weak form. This result corroborates those of Fama and French (1992.993), DeBondt and Thaler (1985), Lo and MacKinlay (1991), Jagadeesh and Titman (1993) and Shleifer and Vishny (1997). Therefore, financial markets efficiency hypothesis in its weak form is also rejected. This result is logical given the limited capacity of the classical theory in explaining abnormal returns such as bubbles, crashes and excess volatility.
Highlights
The main challenge of transforming a centrally-planned economy is the establishment of a set of financial markets that should operate in a reasonably efficient manner
For the seven market indices in the American region, statistics of time series returns leads to the following results
The Augmented Dickey-Fuller (ADF) and PP statistics reported in Table (5) have absolute values greater than the critical values
Summary
The main challenge of transforming a centrally-planned economy is the establishment of a set of financial markets that should operate in a reasonably efficient manner. These markets play several roles in this transformation process. In the early days of a new market, it is clear that market participants are unlikely to act in accordance with the efficient markets paradigm (Cornelius, 1994). As these markets are new, trade is still very thin, disclosure practices of companies are very limited, and there are institutional barriers to trade. The adopted approach provides an indicator of market inefficiency degree and timing and speed of movement towards efficiency
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