Weak-form Market Efficiency Research Articles

Long memory and structural breaks in the returns and volatility of gold: evidence from Turkey

This article examines the long-memory properties and structural breaks in spot and futures gold returns and volatility in Turkey. The data cover the period from 2008 through 2013 in which gold prices hit an all-time high. ARFIMA–FIGARCH model provides evidence of dual long memory in spot series and a lack of long-memory property in futures returns. Anti-persistence in spot returns is indicative of an overreaction of gold prices to new information, thus disconfirming the weak form of market efficiency. The findings further provide evidence of one structural break, which is associated with correction in the gold prices during the post-global financial crisis. The analyses suggest that the long memory is true, not spurious. This implies that long memory is a feature of the data instead of an outcome of structural changes.

Testing Weak-Form Market Efficiency of Next Eleven Countries

This research is based on Efficient Market Hypothesis. Markets are divided into three form based on pricing efficiency and these are weak-form, semi-strong form and strong-form efficiency. The main research question is to investigate weak-form pricing efficiency of “next eleven” countries. We have used historical stock indices returns for ten years period starting from 09/01/2003 to 02/10/2013. Daily full period data is divided into two groups (pre-financial crisis and post-financial crisis). Pre-financial crisis start from January 2003 to March 2008 and Post-financial crisis start from April 2008 to September 2013. Weekly full period returns start from 11/09/2003 to 30/08/2013. The purpose of dividing the sample data into two groups is to check whether financial crisis had any impact on the efficiency of these markets.

The importance of using a test of weak-form market efficiency that does not require investigating the data first

Are financial markets efficient? There are multiple tests for answering this question. Forming a hypothesis and testing should be done before looking at the data, i.e. without data snooping. However, the parameters used in the tests of the efficient market hypothesis are often not decided independent of the data. This paper investigates the consequences of not only this form of data snooping but also the issue of looking at multiple tests. The specific tests compared in this paper are the runs test, the autocorrelation test, and the variance ratio test.

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.

Market efficiency of commodity futures in India

This article aims to examine the market efficiency of the commodity futures market in India, which has been growing phenomenally over the last few years. We estimate the long-run equilibrium relationship between multi-commodity futures and spot prices and then test for weak-form market efficiency by applying both the dynamic ordinary least squares and fully modified ordinary least squares methods. The entire sample period is from 2 January 2006 to 31 March 2011. The results indicate that a cointegrating relationship exists between these indices and that the commodity futures market appears efficient during the more recent sub-sample period since July 2009 onwards.

Macroeconomic Forces and Stock Prices: Some Empirical Evidence from Saudi Arabia

This paper examines if there exists a long run relationship among five macroeconomic variables, consumer price index, industrial output, money supply, exchange rate, oil prices along with the global stock prices proxy Standard and Poor 500 index and Saudi all share stock index. Time series analysis is applied using monthly data from January 1994 to June 2013. Application of Johansen cointegration test finds the existence of a long run relationship among the chosen variables. All macroeconomic variables are found to impact stock prices. Standard and Poor 500 index does not affect Saudi stock prices. Vector error correction model shows the presence of long run causality from the explanatory variables to the stock prices. Short run causality test finds a two-way causality between stock prices and oil prices. Impulse response function shows that industrial production shocks pushes up stock prices while consumer price index shocks pulls it down. Variance decompositions show that historical stock prices are the major driver of Saudi stock prices. This implies that Saudi stock market follows weak form of market efficiency. The results of this paper have important implications for the investors in Saudi stock market.

Is IPOs Trading Enhanced with the Advent of Automated Trading System? A Look at the Efficient Market Hypothesis

We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Automated Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price determination and encoding such information to existing and potential investors for IPOs has significantly improved with related efficiency as most of the IPOs issued during the period after the introduction of the ATS have significantly attracted more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available information as the EMH suggests and does not fulfil the Random Walk Hypothesis (Kendall, 1953, RWH) as a requirement for weak form of market efficiency. However, despite the ATS’s immense contributions, the rate of price swings and inability to fully reflect available information still remains an apparition to the market participants so that prices are either overpriced or underpriced. We use the stability, stationary, and normality diagnostic tests together with the EGARCH and TGARCH to define the trend of the prices. The result is not consistent with the Efficient Market Hypothesis of Fama (1970). Data on each IPO daily prices were obtained from the trading statistics of Colombo Stock Exchange (CSE) consisting of 231 IPO stocks traded between the years 2000 to 2012 consisting of 35,979 monthly observations; these prices are those of IPOs trading after the introduction of the ATS in 1997. The outcome clearly shows that the prices are not normally distributed and are significantly auto-correlated. This result does not support the RWH to satisfy for the weak market efficiency.

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.

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.

Evidence of market inefficiency from the Bucharest Stock Exchange.

This paper examines weak-form market efficiency in the Bucharest Stock Exchange (BSE) using dollar-converted returns from its main index BET. Employing a GARCH methodology, we find evidence that over ten years after its inauguration the BSE is still not weak-form efficient. Further evidence of market inefficiency is found in the consistent presence of a significant January effect. These findings are contrary to the conclusions in Harrison and Patton (2005), who conclude that the Romanian stock exchange was largely efficient by the year of 2000.

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.

Market Efficiency and Behavioural Finance: Evidence from Indian Stock Market

Indian Stock Markets (BSE - NSE) are considered to be one of the most dynamic and emerging stocks market in the world. This piece of empirical work finds evidence on Market Efficiency precisely Weak Form of Market Efficiency and Behavioural Finance. The study uses a Dickey Fuller and Augmented Dickey Fuller model of Random walk to explain S&P CNX Nifty 50 is Weak Form Efficiency on daily basis from 1995 to 2010. Further, the Behavioural Finance section shows evidence on Weak Form Efficiency because of the existence of biases like Momentum Profits and Contrarian Profits. The results for the above mentioned biases are contradictory with the previous researches taken into consideration, i.e. Joshipura (2009) or Jegadeesh and Titman (1993). Finally, the interpretation for Momentum Profits and Contrarian Profits were explained with certain limited assumptions, explanations and news.

African Emerging Equity Markets Re‐examined: Testing the Weak Form Efficiency Theory

AbstractThis paper examines the weak form of market efficiency of five major stock markets; four African equity markets and one developed market. The weekly market index returns of the EGX 30, NSE 20, NSE All Share Index, FTSE‐JSE All Share Index and the S&P 500 Index were analysed for the period 1998–2008. To determine if the stylized fact of stock returns in African markets violate the random walk hypothesis, numerous econometric and statistical techniques are employed. These methods include the autocorrelation test, the unit test, linear and non‐linear models. The results indicate that the African markets do not behave in a manner consistent with the weak form of market efficiency. These results provide a contrast between the emerging African markets and the developed markets. It suggests that African emerging markets have higher average returns and volatility than developed markets. We argue that if the market could be made less volatile, it has the potential to attract more investment because of its attractive returns.

The Persistence of Pricing Inefficiencies in the Stock Markets of the Eastern European EU Nations

This paper applies a range of metrics to test for the presence of weak form market efficiency in the Eastern European countries that joined the EU in 2004, we test both the years prior to and following accession. The results from our tests indicate that, despite the expectations of many previous studies, even after entering the EU the stock markets of these countries still do not conform to even the loosest form of market efficiency. We improve and extend previous studies by incorporating liquidity controls, applying a wider range of methodologies and by using individual stocks rather than indices.

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.

The prospects of BRIC countries: Testing weak-form market efficiency

The main purpose of the study is to determine whether the equity markets of Brazil, Russia, India and China (BRIC) may be considered weak-form efficient in recent years. The major findings using daily data and a bias-free statistical technique with a sample spanning from September 1995 to March 2010 indicate that the results from the last sub-periods, including the subprime crisis, support the belief that these markets may have been approaching a state of being fairly weak-form efficient, which reflects the future prospects of BRIC countries.

Assessing Market Efficiency for Reliance on the Fraud-on-the Market Doctrine After Wal-Mart and Amgen

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the market” doctrine] to prove class-wide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes. Market efficiency cannot be presumed without proof because even large publicly-traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court. Instead, to invoke fraud-on-the market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news --- a hallmark of a semi-strong form efficient market) have any merit. Even then, to claim class wide reliance, plaintiffs must prove such cause and effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do. These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.

Risk prediction management and weak form market efficiency in Eurozone financial crisis

This paper aims to determine if during the recent European financial crisis European markets are efficient in the weak form, as well to introduce an approach to properly predict daily risk of portfolios composed by these market assets, considering their dependence structure. We use daily data from German, English, French, Greek, Dutch and Belgian markets. We perform variance ratio tests to verify the random walk hypothesis. In a general form European capital markets are efficient referent to past information during current crisis. Moreover, through marginal and Pair Copula Construction models, we predict daily Value at Risk for each market and for the portfolio composed by them. Individual risk predictions are correctly simulated. Simulations performed through PCC model properly predict the composed portfolio risk, highlighting that in this crisis period it is crucial to use a tool enable to make correct predictions about risk. The proposed approach emerges as a solution to this task.

A study on weak form of market efficiency during the period of global financial crisis in the form of random walk on Indian capital market

PurposeThis paper aims to study the weak form of efficiency of Indian capital market during the period of global financial crisis in the form of random walk.Design/methodology/approachThe study considered daily closing prices of S&P CNX Nifty, BSE, CNX100, S&P CNX 500 from April 1, 2005 to March 31, 2010. The data source is the equity market segment of NSE and BSE. Both parametric and nonparametric tests (“ex‐posts” in nature) are applied for the purpose of testing weak‐form efficiency. The parametric tests include Augmented Dickey‐Fuller (ADF) unit root tests and nonparametric tests include Phillips‐Perron (PP) unit root tests and Run test. ADF tests use a parametric autoregressive structure to capture serial correlation and PP tests use non‐parametric corrections based on estimates of the long‐run variance of ΔYt.FindingsThe results suggested that the Indian stock market was efficient in its weak form during the period of recession. It means that investors should not be able to consistently earn abnormal gains by analysing the historical prices. Hence one should not be able to make a profit from using something that everybody else knows.Practical implicationsThe study reports that all the stocks in these selected indices are fundamentally strong and their prices are not influenced largely by historical prices and other relevant factors which came from industry and any other information that is publically available. Thus it can be concluded that the Indian stock market was informationally efficient and no investor can usurp any privileged information to make abnormal profits.Originality/valueWhere past studies have examined the weak‐form of efficiency of various markets and the effect of globalisation and global financial crisis on the various sectors of developing and emerging economies, this paper attempts to study the weak form of efficiency of the Indian capital market in the period of recession in the form of random walk.