Abstract
This paper furthers the work on efficiency of developing markets with specific focus on the JSE Limited. Empirical work on the efficiency of the JSE has been mixed; evidence both in favour of and against weak form efficiency is prominent. If markets are efficient new information immediately influences market prices; accordingly, prices follow a random walk and investors will not be able to continuously earn abnormal returns. Both the Augmented Dickey-Fuller and Phillips-Perron tests were employed to test whether the JSE followed a random walk between 1999 and 2014. The null hypothesis (H0) for both tests is that the series of logarithmic returns has a unit root and is therefore weak form efficient. In both tests this H0 is rejected, which proves that for the period under analysis the JSE was not weak form efficient. The influence of factors such as market size and liquidity on efficiency is also discussed.
Highlights
Recent financial development has seen securities from emerging economies, including those listed on the JSE Limited (JSE), take a prominent role in the portfolios of international investors
The South African economy falls under the category of developing economy its stock market more closely resembles that of a developed country since the JSE is substantially ahead of the stock markets of other African countries with regard to both size and sophistication (Smith, Jefferis & Ryoo, 2002)
The efficiency of a stock market can be tested through the use of the random walk hypothesis and it can be applied to either individual shares or general indices
Summary
Recent financial development has seen securities from emerging economies, including those listed on the JSE Limited (JSE), take a prominent role in the portfolios of international investors. The random walk hypothesis asserts that market prices move in a random manner, and as such price movements cannot be predicted. This is consistent with the efficient market hypothesis (EMH). If a random walk is not present there may be distortion in the pricing of capital and risk, meaning market prices could be out of equilibrium. This has drastic implications for the allocation of capital within an economy (Smith et al, 2002)
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