Testing Market Efficiency in Emerging Markets’ Stock Indices with Runs Tests

Abstract

According to the efficient market hypothesis (EMH), the prices of securities reflect all the available information on the market. Efficient markets have an important consequence – it is not possible for an investor to consistently outperform the market by using infor-mation that is not already reflected in the prices of securities. No matter how much re-sources one deploys into security analysis, no excess return can be made, which means that investors seeking higher returns must bear higher risk given the risk-return trade-off. Inefficient markets, on the other hand, offer investors opportunities for higher returns at the same risk profile. In this scientific contribution, we test seven emerging markets' stock indices for a weak form of market efficiency. Numerous previous research indicates that emerging markets are not fully efficient and that prices on their stock markets do not fol-low a random walk. We performed runs tests on weekly and monthly returns of stock in-dices and found statistically significant results in three indices for weekly and three in-dices for monthly returns, which indicates that these indices violate weak form of market efficiency. We found insignificant results, which indicate efficient markets, only for weekly and monthly returns on the Indian BSE Sensex 30 Index. Thus we come to similar conclusions as other authors that emerging markets persist to violate weak form of mar-ket efficiency and remain an attractive opportunity for investors seeking to exploit ineffi-ciencies. Keywords: Market efficiency; Efficient market hypothesis; Random walk; Emerging mar-kets; Stock Exchange Index; Runs test