Tests Of Market Efficiency Research Articles

Performance of Closed-Ended Mutual Funds: A Test of Market Efficiency

Background: Mutual funds, known for aggregating funds from a diverse investor base, play a crucial role in managing small funds smartly. This study evaluates the performance of selected closed-ended mutual funds and examines market efficiency in Nepal. Methods: Using a descriptive and casual-comparative research design, the study spans forty-eight months from January 15, 2018, to January 14, 2022. Monthly data from five mutual funds are analyzed, with metrics such as the Treynor ratio, Sharpe ratio, and Jensen alpha. The study variables include market returns, assets, expense ratios, fund age, liquidity, and mutual fund returns. Various statistical tests, including correlation analysis, Integrated Ranking Analysis, ANOVA test, t-test, and P-value tests, are conducted to determine the significance and statistical relevance of the study variables. Results: The findings reveal that mutual fund performance is influenced by factors such as return, age, liquidity, asset, and expense ratio. Expense ratio and age emerge as the most impactful factors, demonstrating a statistically significant relationship with market return (p < 0.05). All selected mutual funds outperform the market return (NEPSE), with Sanima Equity Fund securing the top rank in all three measures. Conclusion: The Sharpe ratio, Treynor ratio, and Jensen alpha measures for mutual funds surpass those of the market, indicating market inefficiency in its semi-strong form. Novelty: This study uniquely evaluates closed-ended mutual funds using comprehensive performance metrics, demonstrating their significant outperformance compared to market benchmarks. It underscores their effectiveness in actively managing passive funds and challenges the efficient market hypothesis.

The Failure of Silicon Valley Bank: A Test of Market Efficiency

The unexpected collapse of Silicon Valley Bank (SVB) on March 10, 2023, sent shockwaves through the tech industry. SVB, a long-standing financial institution serving tech startups for nearly four decades, suddenly shifted from solvency to insolvency within 48 hours, marking the second-largest bank failure in U.S. history. This event provides an excellent opportunity to test the Efficient Market Hypothesis (EMH), particularly its semi-strong form, which posits that rapid information absorption prevents significant stock price gains in response to new information. This research uses the standard event study methodology in the finance literature to investigate SVB’s collapse and its impact on the stock prices of 30 banks traded on the New York Stock Exchange. The study aims to discern whether stock returns exhibited reactions prior to, on, or after the public announcement of SVB’s failure, thereby assessing market efficiency. Using historical stock and S&P 500 index data, the study analyzes holding period returns, performs regression analyses for pre-event periods, and calculates average excess returns. Results indicate statistically significant negative impacts on stock prices surrounding and on the event date. Furthermore, consistent with behavioral finance theory, a decline in adjusted stock prices approximately 7 days before the event suggests anticipatory market behavior, in line with semi-strong market efficiency. SVB’s case emphasizes the role of external factors, regulatory changes, and industry concentrations in shaping market responses. This research contributes empirical evidence to the discourse on market efficiency, highlighting the need for a nuanced understanding of market behaviors during crises. Lessons from SVB’s collapse will inform regulatory and risk management strategies, impacting future discussions on market efficiency. Likewise, the study results support the semi-strong form efficient market hypothesis and suggest the possibility of trading on this information up to 7 days prior to the announcement consistent with the behavioral finance literature (Bacon & Howell 2021). This study provides valuable insights into market dynamics during unprecedented events, influencing future discussions on regulation, risk management, and market efficiency.

An Entropic Analysis of Efficiency in the West Texas Intermediate Crude Oil Futures Market

For the last 50 years or so, the efficient market hypothesis (EMH) has been the central pillar of economic thought and the building block of portfolio theory. However, the validity of the EMH still remains controversial, and the methods of testing for market efficiency have been criticised. This study utilises entropy analysis combined with generalised autoregressive conditional heteroscedasticity (GARCH) regressions to provide extensive empirical evidence on informational efficiency. This study develops an innovative method for studying market efficiency by investigating the complexity of information saturated in the market. To this end, we have used daily West Texas Intermediate (WTI) crude oil futures contracts from June 1983 to February 2016, giving a total data set of 282,427 observations. The results of the Jensen–Shannon informational criteria indicate that the informational efficiency measure has never reached the maximum value of 1 which indicates weak-form efficiency. Our study has further found that the informational efficiency measure tends to decrease consistently during recessionary periods and to increase in subsequent periods. We have also found that the entropy measure tends to increase over time, supporting the adaptive market hypothesis over the EMH.

The Market Efficiency in the Significant Events/Global Events: A Review of Empirical Research

The efficient market hypothesis is a significant theory widely applied in modern economic and financial research about the impact of sudden global emergencies on various markets. Investigating the influence of the Efficient Market Hypothesis on public contingencies can augment the understanding of market behavior and investors decision-making processes. This could enable anticipating market trends and risks, facilitating prudent investment activities. This study examines the empirical research through the methodology chosen, application, and comparison of conclusions to summarize the effects of the crisis on financial market efficiency within a theoretical analysis framework. This study explores the different methodologies and results of research that test market efficiency in response to events impacting economic performance. As market theory evolves, increasingly refined models are being used, leading to more precise measurements of event effects on markets and better forecasting of market impact for effective decision-making.

Testing of Weak Market Efficiency in Indian Stock Market: An Empirical Study of Pharmaceutical Sector

Testing of Weak Market Efficiency in Indian Stock Market: An Empirical Study of Pharmaceutical Sector

The Covid-19 Pandemic and the Consumer Staples Sector: A Test of Market Efficiency

On Wednesday March 11, 2020, the World Health Organization (WHO) declared the covid 19 outbreak a global pandemic (Cucinotta, 2020). How efficient is the consumer staples market reaction to the announcement of a global pandemic? The purpose of this study is to examine the risk adjusted returns on and around the pandemic announcement to test the semi-strong form market efficiency hypothesis using the standard event study methodology in the finance literature. Will returns in the consumer staples industry show larger than expected gains on and surrounding the WHO’s COVID-19 pandemic announcement? The finance literature offers little evidence supporting the link between pandemics and the stock market. The announcement of a pandemic by the WHO should significantly and quickly affect the market. According to Eugene Fama (1970), if the market is semi-strong form efficient, all public information is immediately factored into the market and no investor can use this information to achieve an above normal return when adjusted for risk. To study this relationship, data for the S&P 500 and 10 consumer staples sector firms were collected for the event period surrounding the announcement of the COVID-19 pandemic. This study tests the global pandemic announcement for semi-strong form market efficiency (Bacon &Howell 2021). Evidence here supports the expected positive signal associated with the sample of consumer staples sector firms in reaction to the announcement of the pandemic. Likewise, the study results support the semi-strong form efficient market hypothesis and suggest the possibility of trading on this information up to 15 days prior to the announcement consistent with the behavioral finance literature (Bacon & Howell 2021).

Earnings Announcement and Stock Prices of Quoted Deposit Money Banks in Nigeria in the Era of COVID-19 Pandemic

ABSTRACT: The study examined the effectiveness of the signaling theory and the efficient market hypothesis in Nigeria during the period of the COVID-19 pandemic which has been an underexplored investigation in the Nigerian capital market. The broad objective of the study was to assess how earning announcements could affect the stock prices of deposit money banks in Nigeria. Specifically, the study sought to analyse the trend of stock prices and examine the reactions of stock prices of quoted DMBs to earnings announcements during a pandemic period in Nigeria. The study employed secondary data from daily closing stock prices of 13 selected banks and the All Share Index (ASI) between 2019 and 2020, sourced from the Nigerian Stock Exchange. The Log-in model, Event-study methodology and the Augmented Dickey-Fuller (ADF) test were used to analyse the data. The event-study methodology employed the market model to estimate the expected returns and abnormal returns during the event window. For the weak form of the market efficiency test, ADF was used to test for the presence of unit roots in the time series. Findings from the study showed that 69.23% of banks' stocks in the Nigerian capital market had negative growth, while 30.77% had positive growth during the period. That abnormal returns around announcement days were not statistically significant as abnormal returns of banks that announced an increase or decrease in earnings were -0.01007 (-0.00533) with t-stat values of -0.30355 (-0.16428) respectively. The implication of the findings is that investors could not earn cumulative abnormal returns during the event window and the abnormal returns of most of the banks had an inverse relationship with earnings announcements. Based on these findings, the study recommended, amongst others, that investors should avoid mispriced stocks while investing in index funds in order to earn market average returns and that regulatory authorities should monitor banks listed on the Nigerian stock exchange to guard against abuse of insider information to the detriment of investors.

Power enhancement for testing multi-factor asset pricing models via Fisher’s method

Testing multi-factor asset pricing models is instrumental for asset pricing theory and practice. However, due to the accumulation of errors in estimating high-dimensional parameters, traditional quadratic-form tests such as the Wald test perform poorly against the sparse alternative hypothesis, i.e., a few mispriced assets. Fan et al. (2015b) introduced a powerful testing procedure by adding a power enhancement component to the Wald test statistic and proved power enhancement properties. To provide an alternative to their methodology, we first instantiate the power enhancement component by introducing a new maximum-form test statistic and then study the asymptotic joint distribution of the Wald test statistic and the maximum test statistic. We prove that these two test statistics are asymptotically independent. Given their asymptotic independence, we propose a new power-enhanced testing procedure to combine their respective power based on Fisher’s method (Fisher, 1925). Theoretically, we prove that the new power-enhanced test retains the desired nominal significance level and achieves asymptotically consistent power against more general alternatives. Furthermore, we demonstrate the finite-sample performance of our proposed power-enhanced test in both simulation studies and an empirical study of testing market efficiency using asset returns of the Russel-2000 portfolio.

Testing of Market Efficiency of BSE GREENEX: An Empirical Analysis

According to the United Nations Principle for Responsible Investment, an investment in a non-ESG compliance company has 28% higher risk per annum as compared to an ESG compliance company. Such company has a positive relationship with the financial performance and the investors cannot outperform these stocks as the information about sustainability compliance is readily available in the market. This concept is of the Efficient Market Hypothesis. Employing a quantitative research design, this study considered 17 companies of BSE Green Index that has considerable ESG scores and extracted their daily, weekly and monthly data to examine and understand its stock return movement and to test whether it follows the Efficient Market Hypothesis. This study makes use of the various statistical tools such as the Run Test, Auto-correlation Function and the Unit Root Test. Summarising the results of run test, Auto-correlation Function and two-unit root test i.e., Augmented Dickey Fuller test and Philips-Perron, it statistically confirmed the findings that the daily, weekly and monthly stock return series of the 17 stocks of BSE Green Index do not obey the ‘Random Walk Hypothesis’ which is the key findings of the study and hence rejects all the three hypotheses of the study. Backing the empirical findings of this study, it would be rational to state that the concept of the Efficient Market Hypothesis does not hold good in the BSE Green Index of the Indian Stock Market and this finding would be very imperative to the investors concerned about their investment decisions with regard to sustainability practices.

Forecasting Volatility in the S&P 500 Index - An Empirical Test of Option Market Efficiency

Forecasting Volatility in the S&P 500 Index - An Empirical Test of Option Market Efficiency

Short-Run Returns around the Trades of Corporate Insiders on the London Stock Exchange

Previous work examined the long-run profitability of strategies mimicking the trades company directors in the shares of their own company, as a way of testing for market efficiency. The current paper examines patterns in abnormal returns in the days around these trades on the London Stock Exchange. We find movements in returns that are consistent with directors engaging in short-term market timing. We also report that some types of trades have superior predictive content over future returns. In particular, medium-sized trades are more informative for short-term returns than large ones, consistent with Barclay and Warner's (1993) stealth hypothesis whereby informed traders avoid trading in blocks. Another contribution of this study is to properly adjust the abnormal return estimates for microstructure (spread) transactions costs using daily bid-ask spread data. On a net basis, we find that abnormal returns all but disappear.

A new test for market efficiency and uncovered interest parity

We suggest a new single-equation test for Uncovered Interest Parity () based on a dynamic regression approach. The method provides consistent and asymptotically efficient parameter estimates, and is not dependent on assumptions of strict exogeneity. This new approach is asymptotically more efficient than the common approach of using OLS with HAC robust standard errors in the static forward premium regression. The coefficient estimates when spot return changes are regressed on the forward premium are all positive and remarkably stable across currencies. These estimates are considerably larger than those of previous studies, which frequently find negative coefficients. The method also has the advantage of showing dynamic effects of risk premia, or other events that may lead to rejection of UIP or the efficient markets hypothesis.

Improved market prediction using meta-heuristic algorithms and time series model and testing market efficiency

Improved market prediction using meta-heuristic algorithms and time series model and testing market efficiency

Do efficient commodity markets co-move: evidence from Indian base metals market

The present study is an attempt to investigate in Indian context two important issues with respect to base metals (these are primarily non-ferrous metals), first to test whether the market for base metals is efficient like other financial markets and second to explore a possibility of any co-integration in prices amongst these base metals. To this end, we collect daily closing prices of five base metals, viz. aluminum, copper, zinc, lead and nickel for the study period Jan 1, 2016, to Dec 31, 2020. The methodology involves three different co-integration tests and two different ‘Day of the Week’ (market efficiency) tests. The results of the study showed that co-integration existed only when aluminium was taken as dependent variable with other metals as forcing variables. Also, no co-integration existed for other four base metals and these results were confirmed by both Engle-Granger and Gregory-Hansen tests; however, Johansen test failed to reveal any co-integration amongst any of these metals. Furthermore, test of market efficiency using ‘Day of the Week’ methodology, with Dummy OLS and GARCH(p,q) approaches, revealed that market for all the metals was efficient except copper. The study also tested model building pre-requisites of stationarity and serial correlation of variables and found these to be satisfactory. The results of the study thus revealed that copper’s prices showed market inefficiency which if exploited could provide a big opportunity for investors, traders and speculators to make profits. Market for remaining four metals was found to be efficient thus making profits difficult; however, these metals can be considered in combination with other financial assets to explore the unexplored opportunities in these markets.

Merger Announcements, Financial Performance and Stock Price: A Test of Market Efficiency

Can investors earn above-normal risk-adjusted returns by acting on public information defined by merger announcements? This study tests the effect of a sample of 14 merger announcements on stock price returns using the risk-adjusted event-study methodology. Results show that an investor is not able to make above￾normal risk-adjusted returns on the announcement of mergers in support of semi-strong form market efficiency. Merger announcements stimulate significant positive returns around the merger announcement. Results show market over- and under-reaction around the merger announcement well documented in the behavioral finance literature. The evidence shows a significant stock price return reaction up to 1 day prior to the announcement consistent with the existence of insider trading (Ross and others, 2016). Do mergers strengthen companies’ financial performance? Results show that mergers are not value-increasing based on the pre-post-merger financial performance in support of the agency problem where large firm use excess free cash flow to get “bigger” not “better” by going shopping for other firms. In such cases, the firm’s merger maximizes size, not stockholder wealth, the goal of the firm.

Early market efficiency testing among hydrogen players

We study the stock price efficiency of companies with exposure to the hydrogen economy. As hydrogen, a pillar of the energy transition required for the global society to achieve the Sustainable Development Goals for 2030, does not trade as a commodity, we use the Solactive Hydrogen Index NTR as a proxy. Efficiency is assessed through a fractal methodology, with data from November 2018 to June 2021. Additionally, we run a time-varying approach that improves the robustness of the efficiency estimates. We find random price behavior consistent with the weak version of the market efficiency hypothesis, with only slight departures from efficiency in some companies with higher hydrogen exposure. There is also evidence of time-varying behavior of randomness during the acute pandemic period. The study validates the Solactive Hydrogen Index as an adequate proxy for the hydrogen economy.

High stakes, experts, and recency bias: evidence from a sports gambling contest

ABSTRACT Sports betting markets provide a unique opportunity to test market efficiency and, in this case, study the presence of recency bias and experts in forecasting sports outcomes. This paper uses a panel data set of individual NFL sports gamblers in a season-long contest known as the SuperContest. The contest is used to track the picks of individual gamblers against the spread on games throughout the 2013–18 NFL regular seasons. We find that overall, the SuperContest entrants are no better at picking winners than a coin flip and exhibit a recency bias. However, more skilled contestants are less susceptible to the recency bias and their skill advantage forecasting outcomes may be their avoidance of a recency bias trap.

Testing for market efficiency in cryptocurrencies: evidence from a non-linear conditional quantile framework

ABSTRACT This study tests for the weak-form market efficiency of 15 cryptocurrency prices. The conventional unit root tests and stationary test results reveal that most cryptocurrency markets are efficient markets. However, the non-linear quantile unit root test proposed by Li and Park (2018) rejects the unit root null hypothesis over the whole quantile level. To derive more informative ideas, we split the whole quantile interval to several sub-intervals and find asymmetric behaviour of the market efficiency across the lower and upper sub-intervals in several cryptocurrency markets. Moreover, non-linear quantile unit root tests for Chainlink, Bitcoin Cash, Binance Coin, EOS, Tron, and Stellar indicate that markets for these cryptocurrencies are efficient at the upper sub-intervals.

Efficient Capital Markets: A Review of Specialized Literature and Methodology on Nigerian Stock Market

The efficiency of securities market has generated a lot of controversy over four decades in finance and economic discussions leading to some people accepting or rejecting the efficient market hypothesis. Hence this paper examines the growing body of empirical research on efficient market hypothesis on the Nigerian capital market for the past twelve years (2010-2021). The paper particularly surveys empirical research and specialized literature as it relates to the Nigerian capital market. The paper is purely empirical research that have been published in various academic journals on the Nigerian capital market. Findings from the empirical research show that there has been no consensus on the efficiency of the Nigerian capital market. However, the market seems to be efficient in the weak-form. The conclusion of this paper is that there are inherent difficulties in testing for market efficiency in developing countries capital market due to certain market imperfections that could affect the informational efficiency of the market.

Testing Market Efficiency In Borsa Istanbul After High Frequency Trading

Yüksek frekanslı işlemlerin sermaye piyasalarında kullanımıyla birlikte yatırım ortamı değişmiş, yüksek frekanslı işlemlerin piyasa etkinliğinin tespitine ilişkin çalışmalarda araştırılması önem kazanmıştır. Yüksek frekanslı işlemlerin, kullanıldıkları piyasalarda hız ve teknoloji avantajları nedeniyle piyasa etkinliğini etkiledikleri ve kısa zaman aralıklarında zayıf formda piyasa etkinliğinin reddedilmesine yol açtıkları gözlemlenmiştir. Borsa İstanbul’un BISTECH sistemine geçmesiyle 2016 yılından itibaren yüksek frekanslı işlemler Türkiye piyasalarında kullanılmaya başlanmıştır. Bu çalışmada yüksek frekanslı işlemler dikkate alınarak, etkin piyasa hipotezinin Borsa İstanbul’daki geçerliliği sınanmıştır. Zayıf formda piyasa etkinliğinin tespiti için literatüre benzer bir şekilde varyans oranı testi kullanılarak rassal yürüyüş hipotezi test edilmiştir. Veri seti olarak Borsa İstanbul’un temel göstergesi olan BIST100 endeksinin 05/02/2019 ve 05/02/2020 dönemleri arasındaki dakikalık getirileri kullanılmıştır. Borsa İstanbul’un dakikalık zaman dilimlerinde zayıf formda etkin olmadığı gözlemlenmiştir. Yüksek frekanslı işlemlerin kullanıldığı Borsa İstanbul’da rassal yürüyüşün olmadığı, durağanlığın mevcut olduğu tespit edilmiştir. Bu sonuç Borsa İstanbul’da yüksek frekanslı işlemler kullanılarak piyasanın üzerinde getiri elde etmenin mümkün olduğunu ifade etmektedir.