Weak Form Of Efficient Market Hypothesis Research Articles

Efisiensi pasar dan mean-reversion di Indonesia

The Indonesian capital market is one of the markets in Asia that has the potential to be influenced by various economic and other global issues. This study aims to examine market conditions in Indonesia in the context of the weak form efficient market hypothesis. The sample used is the rate of return from the composite index in Indonesia with an observation period from 2010 to 2023. This study finds that the average value throughout the observation period is quite small and almost close to zero although it has an optimum return. In further analysis, the finding shows that the market in Indonesia is consistent with the weak form efficient market hypothesis with a mean-reversion tendency.

Apakah Efek Januari akan menyongsong Sang Naga Kayu?

The January effect is an anomaly of the weak-form efficient market hypothesis. The January effect is one of the common issues that spreading in the capital market in early 2024, especially ahead of The Year of the Wood Dragon. In general, the Year of the Wood Dragon is believed to have hopes and optimism among some investors amidst developing global economic issues. The sample used for this study is the market index and returns in Indonesia throughout 2023 and the estimation results for January 2024. The findings show that the market index for January 2024 tends to be higher than December 2023 and has significant differences. However, the return of January 2024 tends to be smaller and is not significantly different from the return of December 2023. In the context of the efficient market hypothesis, although the market index movement pattern tends to be inconsistent with a weak form but the market return does not allow for anomalies in this form. This condition implies that the January effect will not occur before The Year of Wood Dragon of 2024.

Denoising or distortion: Does decomposition-reconstruction modeling paradigm provide a reliable prediction for crude oil price time series?

Reliable forecasting of the crude oil price has important implications for production planning, investment decisions and policy making. Though the effectiveness of denoising hybrid models in crude oil price forecasting has been widely demonstrated, we argue that the denoised series used for model fitting may be affected by the out-of-sample information due to the one-time denoising operation applied to the entire price series. To verify whether the denoising paradigm does improve the crude oil price forecasting, a rolling window mechanism is introduced into two denoising hybrid models based on ensemble empirical mode decomposition (EEMD) and variational mode decomposition (VMD). The novel R-EEMD-RVFL and R-VMD-RVFL models with the random vector functional link (RVFL) neural network are proposed. Then, both monthly and weekly West Texas Intermediate crude oil spot prices are used for multi-step-forward prediction. The experiment reports that: Firstly, the prediction provided by conventional denoising hybrid models is unreliable due to the one-time denoising procedure. Secondly, the proposed R-VMD-RVFL model achieves superior and robust accuracies in both monthly and weekly crude oil price predictions, especially when the forecast horizon is relatively long. Furthermore, this study provides theoretical supports for the findings using the weak-form efficient market hypothesis and behavioral finance theory as well as technical analysis from the perspective of denoising methods.

A COMPARISON OF THE WEAK-FORM EFFICIENCY OF THE ASEAN STOCK MARKETS BEFORE AND DURING THE COVID-19 PANDEMIC

This paper aims to examine the weak-form efficient market hypothesis (EMH) for the ASEAN stock markets before and during the outbreak of the COVID-19 pandemic. The pandemic is a tremendous threat to the health condition and mortality of the world population. An important prevention step undertaken was to have social distancing at different levels of strictness. The ongoing pandemic has caused some negative consequences, including businesses enduring a period of hardship and stock market declines. It seems to be expected that a recession is coming ahead and therefore some people are unwilling to invest in the stock market. On the other hand, some people are optimistic about the economy of ASEAN countries and may think that the declines in stock markets are opportunities to invest. They believe in mean reversion that the falls in stock prices are only temporary and the prices will rebound after some time. If this is true, the market is inefficient and stock prices can be predicted. Conversely, if stock price movements are random walks, shocks to prices will be permanent and prices will reach new equilibrium aftershocks. Hence the market is efficient and stock prices are unpredictable. This study analyses the movements of ASEAN stock markets’ composite indices before and during the outbreak of the COVID-19 pandemic to find out whether the markets are efficient and thus cannot be predicted. We found that some ASEAN stock markets were efficient in both periods, while some others were showing decreased or increased efficiency from the period before the pandemic to the period during the pandemic.

Evaluation of Weak-Form Efficient Market Hypothesis in Zimbabwe Stock Exchange during Pandemic Period

Stock markets, just like other sectors of businesses have been impacted by the COVID-19 pandemic. COVID-19 has caused things to change in some sort; behavior, culture, and economy. Investors’ behavior and expectations may have been shaken. Huge stock market dislocations may have occurred as individual and institutional investors react to bad economic news. This paper evaluated the Zimbabwe Stock Exchange (ZSE) for evidence of a weak-form efficient market hypothesis in the context of a random walk model for the pandemic period. The study used low-frequency data (monthly) from January 2020 to February 2022 for its analysis. The study employed autocorrelation tests, unit root test runs tests, and variance ratio tests. The study found that the autocorrelation tests run tests and the variance ratio tests failed to reject the random walk hypothesis, while the unit root test have opposite results. Given that the variance ratio test is more powerful than the unit root test and that unit root tests have very poor power properties, the study concludes that the ZSE followed a random walk during the pandemic period. The study, however, believes that the efficiency of the stock market may have been attributed to inflation problems during the period. As inflation sours, the revenue growth becomes of nominal terms not real terms, hence actual returns in real terms become meaningless in the financial trade. The study recommended further development of the stock market to resemble those of developed markets with various trading products, greater participation, automation, and capitalization.

Testing of weak form efficient market hypothesis: Evidence from the hat bourse (2010-2019)

Investors need to have an idea about stock market before making investment whether the stock markets are efficient or not to take investment decision in stock market. For that reason, measurement of market efficiency of stock market bears significance to investors. Bearing it in mind, In this paper, we employ various tests to investigate the weak form of the efficient market hypothesis for Casablanca bourse over the period from January 2010 until December 2019, This is done by time series stability tests used to test the weak form efficiency and by using the MADX index that represents full stocks in the Casablanca Bourse. During the period of study. The results show that prices in the financial market follow the hypothesis of random walk, so, it is not possible to achieve extraordinary profits through the use of historical prices in order to predict future prices on the Casablanca bourse.
 Les investisseurs doivent avoir une idée du marché boursier avant d'investir, que les marchés boursiers soient efficients ou non pour prendre une décision d'investissement en bourse. Pour cette raison, la mesure de l'efficience du marché boursier est importante pour les investisseurs. En gardant cela à l'esprit, dans cet article, nous utilisons divers tests pour étudier la forme faible de l'hypothèse de marché efficient pour les marchés boursiers de Casablanca sur la période allant de janvier 2010 à décembre 2019 Ceci est fait par des tests de stabilité de séries chronologiques utilisés pour tester la forme faible de l'efficience, et en utilisant l'indice MADX qui représente les valeurs pleines de la bourse de Casablanca. Pendant la période d'étude.Nous avons conclu que les prix sur le marché financier suivent l'hypothèse de la marche aléatoire, c'est-à-dire qu'il n'est pas possible de réaliser des profits extraordinaires grâce à l'utilisation de prix historiques afin de prédire les prix futurs à la Bourse de Casablanca.

Market efficiency and information flow between the crude palm oil and crude oil futures markets

This study analyzes the efficiency of the crude palm oil (CPO) futures market by conducting a variance ratio test and comparing it to the West Texas Intermediate (WTI) futures market. We discover that the weak-form efficient market hypothesis holds for both the CPO and WTI futures markets despite the significant difference in their liquidity. Using a scaling exponent, we investigate speculative trading activities and find that trading CPO futures in expectation of significant returns does not strongly involve a high level of risk unlike WTI futures. Our findings regarding market efficiency of the two futures markets are supported by the significant integration of the two with similar level of information flow from each market to the other. To explore the role of speculation in their market integration, we introduce a natural experimental setting using the coronavirus disease 2019 (COVID-19) pandemic, which caused a sudden decrease in the demand for fuel. The bidirectional information flow between the two markets is intensified after the COVID-19 pandemic due to lower level of speculation. The findings suggest that (i) stakeholders in the CPO market need to pay attention to the crude oil markets to anticipate its price changes, (ii) investors can use WTI futures as a hedging tool against CPO futures as long as there is mutual information flow, and (iii) regulators should carefully implement new CPO futures market policy, as either asymmetric changes in speculation or unbalanced regulation with the WTI futures market can create market distortion and regulatory arbitrage.

A generalised seasonality test and applications for cryptocurrency and stock market seasonality

This study develops a novel generalised seasonality test that utilises sequential dummy variable regressions for seasonality periodicity equal to prime numbers. It allows to test for existence of any seasonal patterns against the broad null hypothesis of no seasonality and to isolate most prominent seasonal cycles while using harmonic mean p-values to control for multiple testing. The proposed test has numerous applications in time series analysis. As an example, it is applied to identify seasonal patterns in 76 national stock markets and 772 cryptocurrency markets to detect trading cycles, determine their length, and test the weak-form efficient market hypothesis. Cryptocurrency markets are shown to be less efficient than national stock markets, with predominantly irregular seasonality periodicity that cannot be reduced to conventional weekly, monthly, or annual cycles.

Testing and Determining the Form of Market Efficiency in Dhaka Stock Exchange (DSE)

This paper is focused on the idea of whether Dhaka Stock Market (DSM) is efficient in weak-form of Efficient Market Hypothesis (EMH) or not. As any country’s economic condition can be indicated by the efficiency of its stock market, so determining and measuring the different forms of efficiency has always been a well explored topic for researchers. In this paper, attempts have been made to determine and test the market efficiency and randomness of Dhaka Stock Exchange (DSE) in weak form. The entire Dhaka stock exchange has been evaluated by employing daily return from the two indices- DS30 and DSEX. Employing the normality test it is found that both the return series are not normally distributed. Moreover few parametric tests named Augmented Dickey-Fuller test (ADF), Autocorrelation Function (ACF), and Variance Ratio test (Lo & MacKinlay) have been done to examine the historic price dependencies or to examine the random walk hypothesis. The entire test results suggested that DSE is not efficient in weak form which means return from DSE does not follow a random walk.

Market efficiency and volatility within and across cryptocurrency benchmark indexes

With initial coin offerings and token offerings remaining at the forefront of alternative investments, the study of peer groups can be important for comparing investors’ tastes and preferences for particular classes of cryptocurrency on a more equal footing. The aim of this paper is to identify violations of the weak-form market efficiency hypothesis for comparable cryptoassets that are conditional on market segmentation and those conditional on benchmarks. We use daily frequency data of 57 cryptocurrencies that account for more than 90% of the total market capitalization (market cap). We construct seven thematic market cap indexes that are able to represent the whole cryptocurrency universe. Against this background, we test for the presence of four empirical anomalies: risk premium, leverage, regime switch and calendar effects, both across and within these benchmark indexes. The main results support the existence of a switch between two states and positive excess returns toward the end of the week for both cases. Our methodology and findings contribute to the emerging literature on introducing active and passive portfolio management strategies that track benchmark crypto indexes.

Modeling Asymmetric Effects and Long Memory in Conditional Volatility of Dhaka Stock Exchange: New Evidence from Family of FIGARCH Models

This paper investigates modeling the conditional volatility of the Bangladesh equity market, namely the Dhaka Stock Exchange benchmark index (DSEX) and the Shariah Index (DSES), to explore the presence of leverage effects and long memory behavior covering the period from July 01, 2004 to December 31, 2020. We employ a family of Fractionally Integrated GARCH models FIFARCH BBM, FIGARCH CHUNG, FIEGARCH, FIAPARCH BBM, FIAPARCH CHUNG, and HYGARCH to capture both asymmetric effects and long memory behavior in conditional variance, a unique study in volatility literature. We detect strong evidence in favor of asymmetric effects and long memory behavior in the conditional volatility of DSEX and DSES returns, which repudiates the weak-form efficient market hypothesis. The study reveals FIEGARCH and FIAPRACH CHUNG outperform the other fractionally integrated GARCH specifications in modeling conditional volatility of equity returns. The paper further examines the diagnostic test of misspecification of the conditional variance equation based on the news impact curve, and results ensure that all models are fairly specified. This study also looks into the risk-return tradeoff in time-varying volatility and finds no evidence of the positive relationship between equity returns and volatility dynamics. The findings have pragmatic implications for retail and wholesale investors and other market players to initiate the investments and hedging strategies before investing in an emerging equity market like Bangladesh.

Random Walk Hypothesis for Stock Prices in Fiji

The main goal of this paper is to investigate the random walk hypothesis in Fiji using monthly data from January 2000 to October 2017. Applying augmented Dickey Fuller (ADF 1979, 1981) and Phillips-Perron (1988), Zivot-Andrews (1992), and Narayan and Popp (2010) unit root tests, this study finds that stock prices is best characterized as non-stationary. The estimated multiple structural break dates in the stock prices corresponds with devaluation of Fijian dollar by 20 percent in 2009 and General Elections in September 2014, which Fiji First Party won by majority votes. The empirical results indicate that stock prices are best characterized as a unit root (random walk) process, indicating that the weak-form efficient market hypothesis holds in Fiji’s stock market. Hence, it will be difficult to predict future returns based on historical movement of stock prices in Fiji’s stock market.

Market Efficiency of US REITs: A Revisit

The findings on the efficient market hypothesis in the US real estate investment trust (REIT) sector are mixed, and applied methodologies may not be adequate. This paper investigates the weak-form efficient market hypothesis for US REIT stocks. The variance ratio test indicates that the REIT and general stock markets are not efficient in the weak-form: the log price series for REIT stocks violates the random walk theory as a model specification. As an alternative, we applied the quantum harmonic oscillator to provide robust evidence. The quantum harmonic oscillator, including the solution for a random walk as a ground state solution, proved to be a better method for testing the efficient market hypothesis. Contrary to variance ratio test, quantum harmonic oscillator provides results that REIT stocks are more efficient than general stocks, and their market efficiency is close to that of bonds. We argue that large market size and substantial institutional ownership of REIT shares have enhanced market efficiency. The findings suggest that arbitrage in the REIT market cannot be achieved simply by analyzing the historical price trend.

Information Efficiency in the Cryptocurrency Market:The Efficient-Market Hypothesis

ABSTRACT This study tested the efficient-market hypothesis (EMH) to examine information efficacy in the cryptocurrency market. We conducted three random walk tests to verify the weak-form EMH and used the event study method to test the semi-strong-form EMH. The analysis results demonstrated that 54 (6.04%) of the total of 893 cryptocurrency units satisfied the weak-form EMH, and 24 (2.695%) met the semi-strong market hypothesis. Furthermore, we found that, among the cryptocurrency exchanges that were established before November 2017, large size exchanges were more likely to satisfy the weak- and semi-strong-form EMHs.

Predictive power of ARIMA models in forecasting equity returns: a sliding window method

The ARIMA model is widely adopted by the financial industry as the standard statistical instrument for forecasting asset returns. Numerous studies have compared the accuracy of the ARIMA model with other competing models. However, there are no studies that cover a broad range of equities and their time series. Furthermore, there is no clear guideline on the time series window selected to fit the ARIMA model. In addition, there are no firm conclusions on whether older information in the sample should be abandoned. This makes it impossible to draw a definitive conclusion about the predictive power of the ARIMA model. This study sets out to address this gap in the literature. It summarizes more than two million ARIMA forecasts of future daily returns, using data from January 3, 1996 to May 12, 2017. The forecasts are run with different model parameter settings. We find that the five-year sliding fixed-width window fits US equity market asset prices to the highest degree, with an annual over-optimistic error of 2.6561%. However, when environments with positive and negative returns are separated, the ARIMA models generate forecasting errors of − 0.0009% and 0.011%, and both underestimate gain and loss. These errors are lower for low volatility equities. We conclude that the lack of nonlinearity of the ARIMA model is not a major concern, and that the ARIMA models do not lose their validity if the data windows are carefully selected. Our conclusions are not in conflict with the weak form market efficiency hypothesis and are robust in an environment with transaction cost.

A Generalised Seasonality Test and Applications for Stock Market Seasonality

This study develops a novel generalised seasonality test that utilises sequential dummy variable regressions for seasonality periodicity equal to prime numbers. It allows both to test for existence of any seasonal patterns against the broad null hypothesis of no seasonality and to isolate most prominent seasonal cycles while using harmonic mean p-values to control for multiple testing. The proposed test has numerous applications in time series analysis. As an example, it is applied to identify seasonal patterns in 76 national stock markets to detect trading cycles, determine their length, and test the weak-form efficient market hypothesis.

Predictability of Stock Returns on the Dhaka Stock Exchange

The study examines the predictability of index returns on the Dhaka stock market within the framework of the weak-form efficient market hypothesis using historical daily returns for a period of 1st June, 2014 to 29th May, 2020. The Jarque-Bera statistics test explored the return distribution of Dhaka Stock Exchange is non-normal. The random walk hypothesis (RWH) was tested using autocorrelation test, runs test, unit root tests(Augmented Dickey-Fuller (ADF) and, Phillip-Perron (PP) test) and variance ratio test. The results explored that all tests rejected the random walk hypothesis required by the weak-form efficient market hypothesis. This provides empirical basis to infer that the DSE is inefficient at weak-form and stock return can be predicted. The rejection of the RWH on a daily basis is possibly an indication that the weak-form inefficient characteristic of the DSE is not sensitive to return frequency.

Market efficiency of the crude palm oil: Evidence from quantum harmonic oscillator

This study examines the weak-form efficient market hypothesis of the crude palm oil market by adopting the quantum harmonic oscillator. This approach allows us to analyze market efficiency by estimating one parameter: the probability of finding the market in a ground state. Our results confirm that the crude palm oil market is more efficient than the West Texas Intermediate crude oil market. We explain the greater market efficiency comes from a small proportion of speculative transactions, resulting from tight market operation policies.

Unobserved structural shifts and asymmetries in the random walk model for stock returns in African frontier markets

The purpose of this study is to examine the weak-form market efficiency hypothesis (EMH) for 8 African Frontier markets between 2001 and 2017. To achieve this purpose, we employ unit root testing p...

Validity of Weak-Form Market Efficiency in Central and Eastern European Countries (CEECs): Evidence from Linear and Nonlinear Unit Root Tests

Abstract This paper aims to focus weekly stock market prices from the CEECs (Lithuania, Hungary, Romania, Croatia, Slovenia, Poland, Bulgaria, the Slovak Republic, Latvia, Estonia, and the Czech Republic) markets for evidence of weak-form market efficiency. This is complemented by the use of comprehensive unit root tests to test for abnormal return behaviour in these stock markets. For this purpose, Harvey et al. (2008) linearity test was applied in order to determine the characteristics of the series. The results indicate that the series with linear characteristics are Slovenia, Bulgaria, the Slovak Republic, Estonia, and the Czech Republic and those with non-linear characteristics are Lithuania, Hungary, Romania, Croatia, Poland, and Latvia. Then, in order to examine the weak-form market efficiency, DF-GLS (1996), Phillips-Perron (1988) and Lee-Strazicich (2003) unit root tests are applied to linear series and Kapetanios et al. (2003) and Kruse (2011) tests were applied to nonlinear series. The linear and nonlinear unit root tests evidence that all the selected stock markets in CEECs have a unit root, in other words, are non-stationary. In the period analyzed, the results suggest that the weak-form efficient market hypothesis holds in the CEECs. Accordingly, the results indicate support for the validity of the random walks hypothesis in all the selected stock markets in CEECs. It means that investors should not be able to earn abnormal returns by carrying out the same analysis and analysing historical prices in CEECs. The finding of weak-form market efficiency has notable implications from the point of capital allocation, stock price predictability, and the influence of shocks to stock prices.