Measuring the Time-Varying Market Efficiency in the Prewar Japanese Stock Market

Abstract

This study explores the time-varying structure of market efficiency on the prewar Japanese stock market based on Lo's (2004) adaptive market hypothesis (AMH). In particular, we measure the time-varying degree of market efficiency using new datasets of the stock price index estimated by Hirayama (2017aHirayama ( ,b, 2018Hirayama ( , 2019a. The empirical results show that (1) the degree of market efficiency in the prewar Japanese stock market varied with time and that its variation corresponded with major historical events, (2) Lo's ( 2004) AMH is supported in the prewar Japanese stock market, (3) the difference in market efficiency between the old/new TSE shares and the EQPI depends on the manner in which the price index is constructed, and (4) the price control policy beginning in the early 1930s suppressed price volatility and improved market efficiency.