Efficiency in Stock Markets a Review of Literature

Abstract One of the most contentious issues in finance is possibly whether the financial markets are efficient or not. When determining the market efficiency, Efficient Market Hypothesis (EMH) has attracted the interest of greater number of academics and practitioners in empirical finance literature. However, empirical studies of the market efficiency in the two regimes of high and low volatility are still unexplored. Thus, this study attempts to identify the random work behaviour in high and low volatility regimes in emerging financial markets namely, India, China, Indonesia, Korea, Malaysia, Taiwan and Philippine. Returns of daily, weekly and monthly of the market portfolios from 2000 to 2010 are used for the investigation. Primarily, the Iterated Cumulative Sums of Squares (ICSS) algorithm and GARCH regression are used to identify the volatility breaks and for the purpose of subdividing the original series in to low volatile and high volatile regimes. Subsequently, popular econom...

Statistics, Optimization & Information Computing

Hypothesis of Market Efficiency is an important concept for the investors across the globe holding diversified portfolios. With the world economy getting more integrated day by day, more people are investing in global emerging markets. This means that it is pertinent to understand the efficiency of these markets. This paper tests for market efficiency by studying the impact of global financial crisis of 2008 and the recent Chinese crisis of 2015 on stock market efficiency in emerging stock markets of China and India. The data for last 20 years was collected from both Bombay Stock Exchange (BSE200) and the Shanghai Stock Exchange Composite Index and divided into four sub-periods, i.e. before financial crisis period (period-I), during recession (period-II), after recession and before Chinese Crisis (period-III) and from the start of Chinese crisis till date (period-IV). Daily returns for the SSE and BSE were examined and tested for randomness using a combination of auto correlation tests, runs tests and unit root tests (Augmented Dickey-Fuller) for the entire sample period and the four sub-periods.

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.

European Journal of Economics, Finance and Administrative Sciences, 2011

This paper examines the random walk theory and the efficient market hypothesis of Kuwait equity market. The study uses daily observation of Kuwait stock exchange (KSE) index from 17 June 2001 to 8 December 2010. Parametric and nonparametric tests are utilized to examine the randomness of KSE. The parametric tests include the serial correlation test, and the Augmented Dickey-Fuller (unit root) test. The nonparametric tests employ the runs test and Phillips-Peron (PP) test. The empirical findings suggest the KSE is informationally inefficient at the weak-form level indicating that prudent investors will realize abnormal returns by using historical data of stock prices and trading volume.

6th EMAN Selected Papers (part of EMAN conference collection)

This paper aims to test efficiency, in its weak form, in the capi­tal markets of the Philippines (PSEi), South Korea (KOSPI), Indonesia (JKSE), Thailand (SET), Malaysia (KLCI), China (SSEC) and Hong Kong (HSI) over the period from January 2, 2017, to February 17, 2022. The return series shows signs of deviation from the normality hypothesis, given the skewness and kurtosis coefficients. The results, therefore, support the conclusion that the random walk hypothesis is not supported by the indices, the values of the variance ratios are in all cases less than unity, implying that the returns are autocorrelated over time and there is mean reversion in all indices. The re­sults obtained allow for the rejection of the random walk hypothesis and the informational efficiency hypothesis of financial markets. These findings also open room for market regulators to pursue measures to ensure better infor­mation in these regional markets.

The Financial Review, 1999

The few existing studies on equity price dynamics and market efficiency for Latin American emerging equity markets show conflicting results. This study uses multiple varianceratio and auto-regressive fractionally integrated moving-average tests and new data (U.S. dollar-based national equity indices for the 1987-1997 period) to clarify these results. Documented evidence shows that equity prices in major Latin American emerging equity markets-Argentina, Brazil, Chile and Mexico-follow a random walk, and that they are, generally, weak-form efficient. In sum, therefore, the evidence suggests that international investors in these markets cannot use historical information to design systematically profitable trading schemes because future long-term returns are not dependent on past returns.

Review of Quantitative Finance and …, 1999

We use the multiple variance-ratio test of to examine the stochastic properties of local currency-and US dollar-based equity returns in 15 emerging capital markets. The technique is based on the Studentized Maximum Modulus distribution and provides a multiple statistical comparison of variance-ratios, with control of the joint-test's size. We ®nd that the random walk model is consistent with the dynamics of returns in most of the emerging markets analyzed, which contrasts many random walk test results documented with the use of single variance-ratio techniques. Further, a runs test suggests that most of the emerging markets are weak-form ef®cient. Overall, our results suggest that investors are unlikely to make systematic nonzero pro®t by using past information in many of the examined markets, thus, investors should predicate their investment strategies on the assumption of random walks. Additionally, our results suggest exchange rate matters in returns' dynamics determination for some of the emerging equity markets we analyzed.

This note examines the weak-form market efficiency of Latin American equity markets. Daily returns for Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela are examined for random walks using serial correlation coefficient and runs tests, Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) unit root tests and multiple variance ratio (MVR) tests. The results, which are in broad agreement across the approaches employed, indicate that none of the markets are characterised by random walks and hence are not weak-form efficient, even under some less stringent random walk criteria.

Asian Social Science, 2014

This research paper investigates the efficiency of stock market and volatility behavior of eight Asian Emerging market indices. This study used the secondary daily time series data for the period of ten years from 01-01-2004 to 31-12-2013. The Econometric models (GARCH, Autocorrelation and Runs Test) where used to test the volatility and market efficiency of Asian emerging stock markets. Besides, the long run relationship was studied. The Hypotheses about the importance of different channels are tested .This paper provides significant evidences of market efficiency and randomness distribution in these emerging Asian markets. The findings of this study will be useful for investing Community, Government and Policy Regulators in these sample countries.

Hyeladi Stanley Dibal, 2018

With recent technological advancement of financial market dynamics, the need to revisit market efficiency concerns has become more imperative. As markets become significantly efficient and liquid, they attract more investors, while their inefficient counterparts with lower fundamentals discourage investors. Against this backdrop, efficiency with respect to financial markets (stock markets in particular) is viewed as comprising three critical dimensions, namely allocation efficiency, operation efficiency and information efficiency. Allocation efficiency deals with how resources are allocated in the stock market for vitality; operation efficiency deals with how resources are employed in the stock market to minimize transaction costs for optimality; while information efficiency deals with the dynamics of prices and returns in response to the influence of information in the stock market. This conceptual analysis, therefore, focuses on market efficiency, as predictability of stock prices hinges on assumptions of the efficient market hypothesis. The characteristic cascading dimensions in this paper afford contemporary analysts divergent insights towards identifying and filling existing knowledge gaps. This elicits more comprehensive and concurrent diagnosis involving larger samples of stock price and return variables, as well as further projection of the all share index (weighted average of stock prices). This would ultimately facilitate the process of substantiating the efficiency-driven dispositions of normality and random walk in analytical circles.