Testing Market Efficiency: Empirical Evidence from Developed Markets of Europe and North America

Abstract

As per definition of efficient market hypothesis (EMH), there is a need that stock prices should reflect all available information in the market and no investor is able to earn excess return on the basis of some secretly held private, public or historical information. Efficient market hypothesis (EMH) can be further divided into three sub hypotheses depending upon the information set involved and these are weak form efficient market hypothesis, semi strong form efficient market hypothesis and strong form efficient market hypothesis. This study has examined the weak form of efficiency on the six major stock exchanges that are present in North-America and Europe including NYSE Composite (USA), S&P TSX Composite (Canada), FTSE 100 Index (UK), CAC 40 (France), DAX 30 (Germany) and IBEX 35 (Spain). Historical index values are gathered on a monthly, weekly and daily basis for a period of 14 Years (July 1997 to June 2011). Two statistical tests including runs test, and variance ratio test were applied for analysis and results. It is found in the process that two out of six developed stock markets of North-America and Europe doesn’t follow Random-walk and hence NYSE Composite, S&P TSX Composite, DAX 30 (Germany) and IBEX 35 (Spain) are the weak form of efficient markets.