Abstract
In this article the semi-strong form of share market efficiency over the period 1978 to 1992 is considered, particularly with regard to information about changes in the money supply. To ensure a rigorous test of market efficiency, monetary growth has been decomposed, into anticipated and unanticipated elements. The All Share Index of the Johannesburg Stock Exchange is regressed against the monetary variables. The test results indicate that lagged changes in anticipated monetary growth are significant in explaining changes in share prices, a finding contrary to the efficient market hypothesis. However, the low coefficients of determination indicate that only a small percentage of the variation in share prices is explained by ex post changes in money supply and consequently the potential for a trading rule to earn superior returns to the market is limited.
Highlights
The efficiency of capital markets in the allocation of financial resources has long been the subject of a contentious debate both within academic and non-academic circles
The implication of share prices being unbiased estimates of their intrinsic value is that it prevents the development of a trading rule which delivers a superior return above that which is readily available in the market
Except for the treasury bill rate (TBRATE), all the variables are specified in terms of rate of change
Summary
The efficiency of capital markets in the allocation of financial resources has long been the subject of a contentious debate both within academic and non-academic circles. Proponents of efficient markets contend that current share prices reflect all available information and arc an unbiased estimate of the intrinsic value of the underlying asset. In this article the extent to which the JSE meets the requirements for semi-strong form efficiency is explored, with regard to information concerning changes in the money supply. It flows from and extends the methods and results of Bhana ( 1993) in three directions. 'in the current study the total sample period is restricted to correspond ~ith the period over which Smit & Philip ( 1992) have estabhshed evidence of market efficiency in share return-inflation relationships. Fama (1990) has demonstrated that longer return horizons (quarterly versus monthly) tend to explain more return variation, causing a bias against the acceptance of market efficiency in studies of this nature where efficiency is indicated by the absence of significant regression and low coefficients of determination
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