Weak Form Of Efficient Market Hypothesis Research Articles

Informational (in)efficiency of the Polish Stock Exchange

The aim of this study is to determine whether (and to what extent) the weak form of efficient-market hypothesis could be considered true in relation to the financial instruments listed on the Warsaw Stock Exchange in relation to the exchanges of Baltic Sea countries. With respect to the analyzed indices three types of randomness tests were performed: autocorrelation test, series test and unit root test. The direct practical implication of this paper is the assumption that the selected active investment strategies can be successfully used for some groups of shares quoted on WSE, as well as for selected European exchanges.

Malaysian finance sector weak-form efficiency: Heterogeneity, structural breaks, and cross-sectional dependence

This study examines the weak-form efficient market hypothesis (EMH) for the Finance Sector in Malaysian Stock Exchange, by exploring and scrutinizing the firm-level efficiency over for the period from 1st January 1997 to 31st December 2014. For this purpose, we apply panel nonlinear unit root test that accounts for heterogeneity, and panel stationarity test to allow for the presence of structural breaks and cross-sectional dependence (CSD). The main findings of this study suggest the following: first, there is a strong CSD among the price series of finance stocks; second, unlike the traditional panel unit root tests that provide mixed-results, the panel stationarity test which incorporates structural breaks and CSD suggests that these series are characterized as random walk processes implying the Finance Sector is weak-form efficient. The finding of weak-form efficiency has salient implications in terms of capital allocation, stock price predictability, forecasting technique, and the impact of shocks to stock prices.

Volatility and efficiency of the world crude oil market

Purpose – The purpose of this paper is to examine volatility and the weak-form efficient market hypothesis (random walk) of world spot crude oil market. Design/methodology/approach – The study uses the generalized autoregressive conditional heteroskedasticity (GARCH-M), exponential generalized autoregressive conditional heteroskedasticity (EGARCH), and threshold GARCH (TGARCH) models. The data are selected from three markets: Dubai Vetch (DV), West Texas Intermediate, and Europe Brent Spot Price. Findings – The weak-form efficient market (random walk) hypothesis was rejected for all estimated GARCH-M, EGARCH, and TGARCH models, indicating that these markets are inefficient and predictable. For daily data, the empirical results showed the presence of asymmetric effects, and the conditional variance process was found to be highly persistent. Originality/value – This study is unique in its nature as it examines three markets on three continents. In addition, one of these markets (DV) was not carried out by the previous study. This work takes into account the market location.

Evolving efficiency of spot and futures energy markets: A rolling sample approach

In this paper, we examine the weak-form efficient market hypothesis of energy markets by testing the random walk behavior of spot and futures prices. We contribute to the financial market efficiency literature by investigating the time varying markets efficiency using a “rolling sample” approach instead of an analysis of different time periods. For this end, we use the wild bootstrap Variance Ratio (VR) tests and the Detrended Fluctuation Analysis (DFA) technique. Empirical results show strong evidence of time varying markets efficiency with rapid mean reversion towards markets efficiency. The evolving efficiency of spot and futures markets depends on the prevailing economic and political conditions. Among the energy markets examined in this study, the spot and futures crude oil and the RBOB regular gasoline markets show the highest degree of market efficiency, while spot and future propane market is at the end of the ranking.

Are emerging MENA stock markets mean reverting? A Monte Carlo simulation

We provide further empirical evidence on the mean reversion hypothesis for ten frontier stock markets in the Middle East and North Africa (MENA) using a battery of panel and time series econometric tests including Monte Carlo simulations. Standard unit root and panel unit root tests indicate that stock prices in the MENA region are not mean reverting which is consistent with the weak form efficient market hypothesis. However, Monte Carlo simulations depict mean reversion in the stock markets of Saudi Arabia, Jordan and Bahrain.

Co-integration in Pair Trading Strategies. Application to High-Frequency Data on American Equities

The aim of this research is to develop a profitable high frequency pair trading strategy based on selected stocks of S&P 500. The analysis is performed with co-integration method on the 1-minute high-frequency data covering the period Jan 1, 2010 - Dec 31, 2012. Empirical analysis presented in research indicates that the pairs from the same industry performed better than the pairs from different industry and the weak-form Efficient Market Hypothesis (EMH) does not hold here. The best-performed out-of-sample net Sharpe Ratio (SR) is 0.41 in financial sector.

Trading volume and return relationship in the crude oil futures markets

Purpose– The purpose of this paper is to examine the relationship between trading volume and returns in the West Texas Intermediate (WTI) and Brent crude oil futures markets. In so doing, the paper addresses two important issues. First, whether there is a positive relationship between returns and trading volume in the crude oil futures markets. Second, whether information regarding trading volume contributes to forecasting the magnitude of return in the markets, an important issue because the ability of trading volume to predict returns imply market inefficiency.Design/methodology/approach– The paper used daily closing futures price and their corresponding trading volumes for WTI and Brent crude oil markets during the sample period January 2008 to May 2011. Both the log volume and the unexpected component of the detrended volume are used in the analysis in other to have robust alternative conclusion. The generalized method of moments (GMM) approach is used to examine the contemporaneous relationship between returns and trading volume while the Granger causality approach, impulse response and variance decomposition analysis are used to investigate the ability of trading volume to predict returns in the oil futures markets.Findings– The results reject the postulation of a positive relationship between trading volume and returns, suggesting that trading volume and returns are not driven by the same information flow which contradicts the mixture of distribution hypothesis in all markets. The results also show that neither trading volume nor returns have the power to predict the other and therefore contradicting the sequential arrival hypothesis and noise trader model in all markets. Finally, the findings support the weak form efficient market hypothesis in the crude oil futures markets.Originality/value– The findings has important implications to market regulators because daily price movement and trading volume do not respond to the same information flow and therefore the measures that control price volatility should not focused more on volume; otherwise they may not provide fruitful outcomes. Additionally, traders and investors who participate in oil futures should not base their decisions on past trading volume because it will lead to profit loss. The results also have implications for market efficiency as past information cannot assist speculators to forecast returns in all the oil markets. Finally, investors can benefit from portfolio diversification across the two markets.

Testing the weak-form efficiency of the WTI crude oil futures market

The weak-form efficiency of energy futures markets has long been studied and empirical evidence suggests controversial conclusions. In this work, nonparametric methods are adopted to estimate the Hurst indexes of the WTI crude oil futures prices (1983–2012) and a strict statistical test in the spirit of bootstrapping is put forward to verify the weak-form market efficiency hypothesis. The results show that the crude oil futures market is efficient when the whole period is considered. When the whole series is divided into three sub-series separated by the outbreaks of the Gulf War and the Iraq War, it is found that the Gulf War reduced the efficiency of the market. If the sample is split into two sub-series based on the signing date of the North American Free Trade Agreement, the market is found to be inefficient in the sub-periods during which the Gulf War broke out. The same analysis on short-time series in moving windows shows that the market is inefficient only when some turbulent events occur, such as the oil price crash in 1985, the Gulf war, and the oil price crash in 2008.

Multivariate Variance Ratio Statistics: Application to Stock Returns

We propose several multivariate variance ratio statistics. We derive the asymptotic distribution of the statistics and scalar functions thereof under the null hypothesis that returns are unpredictable after a constant mean adjustment (i.e., under the weak form Efficient Market Hypothesis). We do not impose the no leverage assumption of Lo and MacKinlay (1988) but our asymptotic standard errors are relatively simple and in particular do not require the selection of a bandwidth parameter. We extend the framework to allow for a time varying risk premium through common systematic factors. We show the limiting behaviour of the statistic under a multivariate fads model and under a moderately explosive bubble process: these alternative hypotheses give opposite predictions with regards to the long run value of the statistics. We apply the methodology to five weekly size-sorted CRSP portfolio returns from 1962 to 2013 in three subperiods. We find evidence of a reduction of linear predictability in the most recent period, for small and medium cap stocks. The main findings are not substantially affected by allowing for a common factor time varying risk premium.

The Efficiency of Developed Markets: Empirical Evidence from FTSE 100

This paper endeavors to examine weak form efficiency in the Financial Times Stock Exchange 100 (FTSE 100) under the ongoing theory of efficiency, namely the Efficient Market Hypothesis (EMH). In particular, this paper aims to examine the presence of random walk in FTSE 100 during the period from 2001 January to 2009 November which could be the end of the peak of the global financial crisis. Unit root tests such as ADF and PP shows that the market is non-stationary and therefore, random walk hypothesis is accepted. According to GARCH (1, 1) outcomes, in all condition the market prices follow the random walk supporting the weak form market efficiency hypothesis. It can be concluded that in developed markets such as FTSE 100, the existence of weak form market efficiency is evident.

Market efficiency in emerging stock markets: A case study of the Vietnamese stock market

Investors and researchers have been paying increasing attention to the emerging stock markets. In this research we study whether or not weak-form efficiency, which is relatively popular in emerging stock markets, holds for the Vietnamese stock market. We check the random walk hypothesis for weekly stock market returns employing three statistical techniques namely autocorrelation test, variance ratio test, and runs test. Data for analysis was collected from July 28 th 2000 (the first trading session) to July 28 th 2013 (13 years of market operation). Through the graph showing movements in daily prices of the chosen representative stocks and the Vietnam stock index (VN-Index), it is visual that the Vietnamese stock market is not efficient; the fact that psychological factors strongly influence investors is among elements making stock prices predictable. Estimated results have strongly rejected the random walk hypothesis for the whole period of the samples and for the first two cycles of the market (except for the third cycle). Particularly results from the third cycle of the Vietnamese stock market alone (from February 24 th 2009 to July 28 th 2013) have provided evidence supporting random walk hypothesis in VN-index. It shows the fact that the efficiency of the Vietnamese stock market has gradually been improved during nearly 10 years in operation. The main conclusion drawn from results of this research is that it may be the case that the weak-form efficient market hypothesis does not hold for the Vietnamese stock market.

Rise of the 'tiger cub' economies: an empirical investigation of Southeast Asian stock market efficiency

This paper assesses the evolving efficiency status of Southeast Asian (SEA) ‘tiger cub’ stock markets. The weak-form efficient market hypothesis (EMH) is examined using daily price index data and variance ratio tests from 2000 to 2012. We also explore two diverse sub-periods of economic activity concerning the global financial crisis (GFC); pre-GFC (2000–2006) and GFC (2007–2012). The pre-GFC test findings show that price return predictability exists in the stock markets of Indonesia, Malaysia and the Philippines. In the GFC period, the results reveal that the Indonesian stock market became less predictable, while Malaysia and the Philippines demonstrated similar pre-GFC return predictabilities. The Thai stock market followed a random walk across all periods investigated. Despite uncertainty surrounding the Association of Southeast Asian Nations (ASEAN) economic initiative, it appears that key tiger cub stock markets are becoming more weak-form efficient.

Evidence on the Efficient Market Hypothesis from 44 Global Financial Market Indexes

This paper employs Granger causality tests to identify the impacts of historical information from global financial markets on their current levels in 30-day windows. The dataset consists primarily of the daily index levels of the (1) open, (2) closed, (3) intraday high, (4) intraday low, and (5) trading volume series for the world’s 37 most influential equity market indexes, two crude oil prices, a gold price, and four major money market prices in the United States are used as control groups. Our results indicate a persistent impact of historical information from global markets on their current levels, and this impact duplicates itself in a cyclical pattern consistently over decades. Such persistence in the patterns causes some market indexes to be upgraded to global or regional market leaders. These findings can be interpreted as constituting violations of the weak-form efficient market hypothesis. The results also reveal recursive impacts of information in these markets and the existence of an information digestion effect.

Further Evidence of Long Memory in China��s Stock Market Based on ARFIMA Model

Assessing whether stock markets have reflected changes to macroeconomic fundamentals has been one of the most engaging topics recently. This paper considers the effects on multi-step prediction of using semiparametric local Whittle estimators rather than MLE for long memory ARFIMA model. By testing the efficiency of the China’s stock market with ARFIMA model analyses of selected the representative stock price index. The analysis indicated that most of stock price index time series are mean reverting over the long run and follow a long memory process, offering evidence against weakform efficient market hypothesis (EMH).The ARFIMA model establishes the presence of patterns in the historic time series of the China’s stock market, providing additional support against the weak-form EMH.

Using Behavioral Economics to Analyze Credit Policies in the Banking Industry

1. Introduction Are private banks efficient when providing credit to the real economy? Probably, in the last decades there has not been such a bitter debate in academic research as the one related to efficiency in financial markets. Hence, we will not find a unanimous answer to that question, but in the midst of the worst financial crisis since the Great Depression, it seems unavoidable to wonder how did all go wrong? Kindleberger (1978) provided what Shleifer (2000) named the 'anatomy of a price bubble': a process that starts with some good news that generate a profit in an asset, followed by a 'smart-money response' where both the supply and the demand of such asset are encouraged by initial investors. The bubble is then sustained by the same investors, who stimulate positive feedback trading by (...) facilitating noise trader speculation (Shleifer, 2000, p.172). That is, the same agents who are benefited in the early stages of the bubble generate a greater supply of the asset and encourage other actors to participate, increasing the demand and sustaining asset prices until the market, eventually, collapses. Hens and Bachmann (2008) explain the anatomy of the financial bubble that led to our present crisis. They interpret the initial good news that rose prices on the real estate market as the speculative money coming into the house market after the dot-com bubble burst. Then, smart-money investors started the packaging of mortgage risks in new securities (MBS) that are sold outsourced in special investment vehicles (SIV) and sold worldwide (p.94). This approach is focused on the role that subprime mortgages had in the process that led to the crisis, but in this paper we want to delve a little deeper into the study of how the 'smart-money response' promoted the credit growth in order to sustain the bubble. The financial meltdown highlighted significant shortcomings on procedures used by the banking sector when providing credit to the real economy for two reasons. First, a long period of indulgence granting personal loans and mortgages boosted the credit bubble all over the world, and second, after the collapse of Lehman Brothers, an era of suspicion within the banking sector precipitated the liquidity crunch and the credit squeeze to private agents. A traditional approach to analyze market efficiency is the efficient market hypothesis (EMH) by Fama (1970) applied to capital markets. In this paper we will first provide a brief outlook on several ideas that behavioral economics has presented when analyzing the EMH in the context of capital markets, and then, in the bulk of this paper, we shall apply that analysis to the study of retail banking sector -both from a macro and a micro perspective- when granting credit to businesses and households. 2. Behavioral Finance and the EMH on Capital Markets The efficient market hypothesis (EMH) postulates market prices reflect the 'true value' of capital stock, given information available. Fama (1970) sees three categories in the EMH. Under the weak-form EMH, current stock prices fully reflect all currently available market information. Hence, past price and volume information would have no relationship with the future direction of security prices. The semistrong-form EMH assumes current stock prices adjust rapidly to the release of any market and non-market information available to the agents. Finally, the strong-form EMH version implies that prices fully reflect all public and private information. The strong-form assumes perfect markets where information is cost-free and available to all market participants at the same time. (3) Empirical data has challenged the EMH. Relevant examples are Shiller (1981), De Bondt and Thaler (1985), Jegadeesh and Titman (1993), Siegel (1998) or even Fama (1991) and Fama and French (1992), which evidence market anomalies inconsistent with market rationality. Empirical evidence against the weak form EMH include stock market volatility much higher than justified by the expected net present value of future dividends, extreme losers (the worst performing stocks over a long period in the past) outperforming extreme winners in the short future -a sign of overreaction and return to the mean- or, on the contrary, for short term periods price movements over six to twelve months tend to predict future movements in the same direction (which is called 'momentum'). …

Weak-Form Market Efficiency of the Nigerian Stock Market in the Context of Financial Reforms and Global Financial Crises

The weak-form efficient market hypothesis for the Nigerian Stock Market (NSM) is explored using different statistical tests. The analyses use overall stock market returns collected over the period 2000–2010. It is shown that the NSM is not weak-form efficient which questions the benefits of the 2004 financial reforms. It is also shown that the degree of market inefficiency varies across the periods corresponding to the financial reforms and 2007 global financial crisis, for daily and monthly returns. The results are important to security analysts, investors, and security exchange regulatory agencies in their investment, stock market development, and policy-making decisions.

Crash occurrence probability and stock market efficiency the indie stock exchange case via Shannon entropy

In this study, we evaluate the relationship between efficiency and probability of the crash, thus the evolution of the daily informational efficiency is measured for the indie stock market index. The efficiency, which is the issue addressed by the weak-form efficient market hypothesis, is calculated using a new method the Shannon entropy and the symbolic time series analysis. A logit model is applied in order to study the relationship between efficiency and probability of the financial crash.

Efficiency of Crude Oil Futures Markets: New Evidence from Multifractal Detrending Moving Average Analysis

In this paper, we examine the weak-form efficient market hypothesis of crude oil futures markets by testing for the random walk behavior of prices. Using a method borrowed from statistical physics, we find that crude oil price display weak persistent behavior for time scales smaller than a year. For time scales larger than a year, strong mean-reversion behaviors can be found. That is, crude oil futures markets are not efficient in the short-term or in the long-term. By quantifying the market inefficiency using a "multifractality degree", we find that the futures markets are more inefficient in the long-term than in the short-term. Furthermore, we investigate the "stylized fact" of volatility dynamics on market efficiency. The simulating and empirical results indicate that volatility clustering, volatility memory and extreme volatility have adverse effects on market efficiency, especially in the long-term.

Does Past Information Help Predict Future Price Movements in Emerging Capital Markets? Evidence from the Colombo Securities Exchange

This article examines as to whether past stock prices in the Colombo Securities Exchange (CSE) exhibit predictability of future prices by using various statistical tests for the period from 1985 to 2009 on daily data. The findings of various statistical tests generated mixed results. The results of tests on serial correlation, runs test, variance ratio test and tests on the day-of-the-week effect rejected the weak-form of Efficient Market Hypothesis, whereas Augmented Dickey–Fuller (ADF) test and Phillips Perron (PP) unit root tests as well as the month-of-the-year test failed to reject the presence of random walk. Findings of the ADF and PP test statistics implied that daily changes in stock prices cannot be predicted, so that no investor can earn abnormal profits by exploiting past stock price patterns. This indicates the presence of weak-form efficiency in CSE. However, the results of serial correlation tests, runs test and variance ratio test imply that prices of ASPI do not reflect past prices, indicating that future movements of the stock prices can be predicted by using past price movements. The idea that past price information can only partially predict the future movements of prices/returns indicates that other information is also vital in changing stock prices/returns. The article concludes that the weak-form inefficiency is the normal situation in the CSE.

Predicting Asset Returns in Developed and Emerging Markets

This paper investigates the predictability of asset prices among developed and emerging markets. Weekly and monthly stock market indices from developed and emerging market economies are analysed to check the validity of weak-form of Efficient Market Hypothesis (EMH) using various empirical methods described in literature. Results demonstrate the possibility of predicting monthly returns in developed markets. Effective international diversification is possible as long-term co-movements among markets are not observed. However, co-movements are observed in monthly returns of U.S.A, Japan and U.K. thus, enabling an investor to predict monthly returns in these markets. Overall results show that prediction of asset returns in emerging markets is intricate in comparison to developed markets.