Weak-form Market Efficiency Research Articles

Cross-country determinants of market efficiency: A technical analysis perspective

This study examines the relative impact of seven factors, including herding, sentiments, and institutional quality, on varying levels of weak form market efficiency across 50 stock markets. The analysis focuses on the profitability of technical analysis trading strategies to address issues with other (statistical) market efficiency measures related to information and transaction costs (Griffin et al., 2010). Proxies for herding, institutional quality, and equity market development consistently emerge as the most significant cross-country determinants of relative market efficiency. In contrast, proxies for fractionalization, chaos, and investor protection play comparatively weaker roles. We also find no clear link between market efficiency and sentiment proxies.

Simulation-based Forecasting for Intraday Power Markets: Modelling Fundamental Drivers for Location, Shape and Scale of the Price Distribution

During the last years, European intraday power markets have gained importance for balancing forecast errors due to the rising volumes of intermittent renewable generation. However, compared to day-ahead markets, the drivers for the intraday price process are still sparsely researched. In this paper, we propose a modelling strategy for the location, shape and scale parameters of the return distribution in intraday markets, based on fundamental variables. We consider wind and solar forecasts and their intraday updates, outages, price information and a novel measure for the shape of the merit-order, derived from spot auction curves as explanatory variables. We validate our modelling by simulating price paths and compare the probabilistic forecasting performance of our model to benchmark models in a forecasting study for the German market. The approach yields significant improvements in the forecasting performance, especially in the tails of the distribution. At the same time, we are able to derive the contribution of the driving variables. We find that, apart from the first lag of the price changes, none of our fundamental variables have explanatory power for the expected value of the intraday returns. This implies weak-form market efficiency as renewable forecast changes and outage information seems to be priced in by the market. We find that the volatility is driven by the merit-order regime, the time to delivery and the closure of cross-border order books. The tail of the distribution is mainly influenced by past price differences and trading activity. Our approach is directly transferable to other continuous intraday markets in Europe.

Market Efficiency of Base Metal Futures in India: An Empirical Evidence

Base metals are the key input used in different critical industries which are vital to the economy. After lifting the prohibition on commodity futures trading in 2003, there has been a surge in the volume, value and open interest of the commodity futures segment in India. Considering the growth momentums of futures, the article is an attempt to examine the market efficiency of the metal futures in India. The study examines the weak-form market efficiency of different base metal futures contracts traded at Multi Commodity Exchange of India. For the said objective, the study uses fully modified ordinary least square and dynamic ordinary least square methods. The study concludes that there exists a long-run cointegrating relationship between the spot and futures prices of different base metals, and it is found that the base metals futures markets of India are less efficient. The period of the study is limited to 7 years, and the study has considered only near-month contracts. Future research will explore the efficiency of the base metal market of other developing nations. JEL Codes: G13, G14, C58

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.

Inefficient Forecasts at the Sportsbook: An Analysis of Real-Time Betting Line Movement

This paper tests the efficiency of a set of sports betting markets using detailed betting line movement from opening until closing for four different sportsbooks for each of 3,681 Major League Baseball games. The reliability of the markets’ forecasts are assessed at several lead times. The forecasts are mostly reliable, but there are simple betting strategies that would have yielded significant profit. In addition, forecasts do not always improve monotonically as the games get closer, despite more information being available; forecasts at weekend day games’ start times are significantly worse than forecasts 90 minutes earlier. Furthermore, analysis of the sequences of forecasts within individual games reveals that these betting markets do not incorporate information optimally. There is sufficient evidence to reject weak form market efficiency; specifically, betting lines tend to overreact, exhibiting significant negatively autocorrelated changes that could be exploited by sophisticated bettors. This paper was accepted by Manel Baucells, behavioral economics and decision analysis. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.00456 .

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.

Evolving efficiency of the BRICS markets

This paper investigates a time-varying version of weak-form market efficiency in the BRICS countries. A moving window test for sample autocorrelations is applied alongside a Kalman filter approach to recover the hidden dynamics of the market efficiency process through appropriate time-varying autoregressive models with both homoscedastic and heteroscedastic conditional variance. Monthly data cover the period from January 1995 to December 2020, which includes the 2008–2009 global financial crisis and the recent COVID-19 recession. The results reveal that all the BRICS stock markets were affected during both periods, but generally remained weak-form efficient, with the exception of China.

The Impact of COVID-19 on Weak-Form Efficiency in Cryptocurrency and Forex Markets.

The COVID-19 pandemic has had an unprecedented impact on the global economy and financial markets. In this article, we explore the impact of the pandemic on the weak-form efficiency of the cryptocurrency and forex markets by conducting a comprehensive comparative analysis of the two markets. To estimate the weak-form of market efficiency, we utilize the asymmetric market deficiency measure (MDM) derived using the asymmetric multifractal detrended fluctuation analysis (A-MF-DFA) approach, along with fuzzy entropy, Tsallis entropy, and Fisher information. Initially, we analyze the temporal evolution of these four measures using overlapping sliding windows. Subsequently, we assess both the mean value and variance of the distribution for each measure and currency in two distinct time periods: before and during the pandemic. Our findings reveal distinct shifts in efficiency before and during the COVID-19 pandemic. Specifically, there was a clear increase in the weak-form inefficiency of traditional currencies during the pandemic. Among cryptocurrencies, BTC stands out for its behavior, which resembles that of traditional currencies. Moreover, our results underscore the significant impact of COVID-19 on weak-form market efficiency during both upward and downward market movements. These findings could be useful for investors, portfolio managers, and policy makers.

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.

An innovative high-frequency statistical arbitrage in Chinese futures market

The primary use of futures is hedging risk. Traders in the spot market can hedge certain risks through the futures market. With the development of the futures market, the arbitrage transactions around futures have attracted increasingly attention. The aim of this paper is to establish an innovative and unique pairs trading framework, and use it to test the effectiveness of China's futures market. The framework for pairs trading is based on cointegration test, Kalman filter and Hurst index filtering. We use the data of 47 commodities with relatively good liquidity in the Chinese commodity futures market. We apply the representative index of China's commodity futures market, "Wenhua Commodity Index" as the benchmark, to evaluate the performance of the strategy and compare it with the benchmark model. This study found that, according to the pairs trading framework, after considering transaction costs, the cumulative return in the sample reached 81%, the cumulative return out of the sample was 21%. It is worth noting that the out-of-sample maximum drawdown achieved excellent results of no more than 1%. In the same period, trading the Wenhua Commodity Index with a "buy and hold" strategy achieved a gain of 31%, but with maximum drawdown reached 15%. The values of our paper are, first it proves that Chinese commodity futures market is not a weak-form efficient market, because technical analysis based on machine learning could obtain excess returns. Second, this research combines the theory and practice of statistical arbitrage, which also provides guiding significance for investment practice.

EVALUATION OF SUPPORT VECTOR MACHINE BASED STOCK PRICE PREDICTION


 
 
 In recent years with the advent of computational power, Machine Learning has become a popular approach in financial forecasting, particularly for stock price analysis. In this paper, the authors develop a non-recurrent active trading algorithm based on stock price prediction, using Support Vector Machines on high frequency data, and compare its risk adjusted performance to the returns of a statistical portfolio predicted by the Capital Asset Pricing Model. The authors selected the three highest volume securities from a pool of 100 initially selected stock dataset to investigate the algorithmic trading strategy. The abnormal return estimates are significant and positive, and the systematic risk is lower than unity in all cases, suggesting lower risk compared to the market. Moreover, the estimated beta values for all stocks were close to zero, indicating a market independent process. The correlation analysis revealed weak correlations among the processes, supporting the potential for risk reduction and volatility mitigation through portfolio diversification. The authors tested an equally weighted portfolio of the selected three assets and demonstrated a remarkable return of 1348% during the evaluation period from July 1st, 2020, to January 1st, 2023. The results suggest that the weak form of market efficiency can be questioned, as the algorithmic trading strategy, employing a Support Vector Machine binary classification model, has consistently generated statistically significant and substantial abnormal returns using historical market data.
 
 

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.

Weak-form market efficiency and corruption: a cross-country comparative analysis

PurposeThe economic and administrative conditions of countries normatively have an effect on the economy and level of market development. Moreover, it is of great importance for a healthy economy whether the public institutions and organizations are transparent and functioning in accordance with their purpose. The aim of this study is to show whether there is a relationship between transparency and market efficiency.Design/methodology/approachCorrelation analysis has been conducted between prediction accuracy rates, which are obtained by seven different machine learning algorithms and Corruption Perception Index (CPI) levels.FindingsIt has been statistically shown that the indices of countries with low corruption levels are harder to predict, which, in turn, can be interpreted as having higher weak-form market efficiency. According to that, an intermediate negative correlation has been found between CPI scores and predictability levels of stock indices. Considering the findings, it can be interpreted that the markets of countries with relatively more transparent and well-functioning public sector have more weak-form market efficiency.Research limitations/implicationsThe study can be extended with cutting-edge machine learning and deep learning techniques in future studies. There are very few studies which try to explain factors related to market efficiency. Thus, the authors claim that there is still room for further research in order to determine the factors related to market efficiency, implying that current literature is still far from explaining the causation behind the inefficiencies.Practical implicationsAccording to findings, the markets of countries with relatively more transparent and well-functioning public sector have more weak-form market efficiency. Based on these findings, in practice, it can be said that more successful predictions can be made using machine learning algorithms in countries with relatively lower CPI scores.Originality/valueIn literature, the factors related to market efficiency are still far from explaining the causation behind the inefficiencies. Thus, it has been investigated whether transparent and well-functioning public institutions and organizations have any relation with market efficiency.

The Random Walk and Systematic Risk in Indonesia

Purpose: During the period 2022 until January 2023, several new global issues emerged besides the COVID-19 pandemic and had an impact on economic. This study aims to examine the weak form of market efficiency in Indonesia under the assumption that uncertain economic conditions tend to affect systematic risk and cause stock returns randomly move. Methodology: This study employs time series data based on the stock returns of 766 firms in Indonesia during the period January 3, 2022, to January 31, 2023. To detect random walk, the runs test is conducted with supporting of the variance ratio test. Findings: Systematic risk plays an important role in risky assets' efficiency during uncertain economic events which is consistent with the random walk theory. Otherwise, the impact of uncertain economic events on less risky assets gives the investors possibility to obtain extraordinary returns or abnormal returns. Originality/Value: This study examines market efficiency by taking into account the systematic risk of assets that are rarely analyzed at present.

Forecasting Stock Prices on the Basis of Technical Analysis in the Industrial Sectors of the UK Stock Market

This study aims to evaluate, critically and rigorously the weak-form market efficiency and forecasting power of technical analysis in different industries in the London Stock Exchange. Weekly data were collected from the FTSE-all share index, FTSE-350 general industrial index and twenty companies of four different industries, for the period between 1997 and 2017. Bai-Perron’s multiple breaks test was applied to diagnose plain data period for the purpose of forecasting. The statistical inference was made from the application of the runs test, variance ratio tests, Ljung-Box’s test and ADF-unit root test that the market is not weak-form efficient and stock prices are predictable. This study extends the current literature by considering the existence of weak-form inefficiency in different industrial sectors. The findings do not support for weak-form efficiency over the periods tested from the application of the ARIMA and GARCH (1, 1) models and double and triple exponential smoothing techniques

The Relationship Between Stock Market and Market Efficiency: the Nigerian Experience

The efficient market hypothesis (EMH) has been subject to debate for decades. The field of behavioural finance was developed in response to the body of anomalous evidence with regard to the EMH. However important the establishment of the EMH by Fama in 1970, the first ideas on a theory of efficient markets can be traced back to the origins of modern economics. Reviewing seminal work underlying the efficient markets theory, and focusing on the development of appropriate methodology to test for weak form market efficiency. The study empirically investigated the effect of stock market on efficient market hypothesis with emphasis on weak form hypothesis for the period of 1986 to 2021. Using descriptive analysis and Ordinary Lease Square regression econometric approach to analyze the relationship between stock market and market efficiency in Nigerian. The outcome from the result found that market capitalization has significant effect on share price while value of transaction had insignificant effect on share price in Nigeria, the study therefore concluded there is existence of weak form of efficient market hypothesis in Nigeria stock market. Keywords: Stock Market, Market Efficiency, Nigeria DOI: 10.7176/EJBM/15-4-06 Publication date: February 28 th 2023

Topic: A Study of Informational Efficiency in Nifty 50 - Event Study.

Market efficiency and asset pricing  has been intriguing topic for all financial economists.  Researchers have been actively studying on the various aspects of market microstructure and market efficiency since 1950s. The area still holds its significance ,as newer dimensions are being explored. The objective of this paper is to study Informational efficiency of Nifty -50 and how events like result announcements impacts the efficiency of individual stock. Efficient market hypothesis implies that the stocks follow random walk and it is impossible to make trading strategies in the longer run. In shorter period there may be a lag between the stock prices and new information related to the stocks, however it adjusts very quickly. In this paper we have tested for the random walk of Nifty in two different time horizon and Informational efficiency of three heavy weighted stocks of Nifty 50. Another pilot study has been calculated on top three heavy weighted stocks of Nifty -50 to check informational efficiency and how quickly stocks adjust to new information in the form of results. The methodologies used to test the hypothesis are ‘Variance ratio’ introduced by (Lo and Mackinlay,1998)  and then used by many researchers for the test of random walk. (Omar, S. et al 2018; Cao, C. et al 2017; Charles and Darne, 2009,) and Event Study methodology. Findings of the study shows that the Nifty -50 does not follow random walk phenomenon, neither in the short long and nor in the long run. The pilot study of Informational efficiency found that two heavy weighted stocks (Reliance Industries and HDFC bank) shows that event has a significant impact on the stocks, Moreover the market was not able to factor the available information the stocks declined in the adjustment window as well. The null hypothesis of CAR being equal to 0 has been rejected and Null hypothesis is accepted. In both the test the Semi -Weak form of market efficiency has been rejected.

Testing the efficiency of emerging markets: Evidence from nonlinear panel unit tests

In this study, we investigate market efficiency considering nonlinearities by testing the weak-form market efficiency of the stock markets of Brazil, China, Russia, Turkey, and South Africa using recently proposed nonlinear panel unit root tests. The stock markets of these emerging countries are deliberately selected for their market capitalization to form a homogenous panel. The results of nonlinear models indicate that the stock market indexes are stationary and weak-form inefficient. This finding contributes to the contradictory results of the prior research using linear and nonlinear models about the efficiency of emerging stock markets in favor of nonlinear ones. Furthermore, we propose that studies using financial variables consider such nonlinearity in order to achieve more accuracy in findings related to such studies.