Testing the Weak Form of Efficient Market Hypothesis: Empirical Evidence from Equity Markets

Rui Dias,Teresa Godinho,Paula Heliodoro,Nuno Teixeira

doi:10.11648/j.ijafrm.20200501.14

Rui Dias, Teresa Godinho + Show 2 more

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https://doi.org/10.11648/j.ijafrm.20200501.14

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Abstract

The aim of this paper is to analyse integration and test the hypothesis of an efficient market, in its weak form, in sixteen international financial markets. The sample covers the period from January 2002 to July 2019 and is divided into three sub-periods. In order to achieve such an analysis, the aim is to provide answers to two questions. Has the global financial crisis intensified the financial integration of international markets? If there is a process of mean-reversion in the international stock markets, with arbitrage, the hypothesis of portfolio diversification will be feasible? The results suggest that the global financial crisis has intensified the integration level of international financial markets. Regarding random walk and market efficiency hypotheses, in its weak form, the results suggest the existence of a mean-reversion and the rejection of the hypothesis of information efficiency, in its weak form, in developed and emerging markets, European and non-European. In terms of portfolio diversification analysis, we see that levels of financial integration decreased significantly in the sub-period following the global financial crisis, namely with its respective benchmarks, such as the US market, Japan and Hong Kong. We can assess the existence of feasible diversification opportunities in the long term.

Highlights

In the last few decades, globalization phenomenon has shown that correlation between international financial markets has increased significantly, among developed markets
In order to analyze financial integration and meanreversion, we selected sixteen international financial markets in Europe, Asia, Latin America and the US Data on the daily price indices of the various markets were obtained from the DataStream platform, all quotes are in local currency, with the intention of mitigating the exchange rate risk
We chose to divide the sample into three subperiods, one pre – CFG (Global Financial Crisis) corresponding to the subperiod from 1 January 2002 to 31 July 2007, one of crisis, which we call the Global Financial Crisis covering the subperiod from 1 August 2007 to 14 December 2014 and a third subperiod containing the time lapse from 1 January 2015 to 4 July 2019, which we call for post subperiod - CFG

Summary

Introduction

In the last few decades, globalization phenomenon has shown that correlation between international financial markets has increased significantly, among developed markets. The authors Forbes and Rigobon [1] suggest that links between international stock markets may be strong in quiet and crisis periods, which may limit the possibility of portfolio diversification. The market integration situation may have significant implications for international portfolios diversification [2]. Different studies have analysed the issue of market efficiency, by examining the profitability predictability hypothesis, by analyzing the mean-reversion of the financial markets prices [3]. Whenever the chances of random walk and informational efficiency are rejected, it causes extreme co-movements in stock prices. The event of these phenomena could possibly reduce the implementation of strategies for the efficient portfolios diversification [4, 5]

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