Testing Semi-strong Form Efficiency of Stock Market

Abstract

The efficient market hypothesis suggests that stock markets are “informationally efficient”. That is, any new information relevant to the market is spontaneously reflected in the stock prices. A consequence of this hypothesis is that past prices cannot have any predictive power for future prices once the current prices have been used as an explanatory variable. In other words the change in future prices depends only on arrival of new information that was unpredictable today hence it is based on surprise information. Another consequence of this hypothesis is that arbitrage opportunities are wiped out instantaneously. Empirical tests of the efficient market hypothesis actually test for these consequences in various ways. Some of them have been summarised in earlier chapters. These tests generally could not conclusively accept the random-walk hypothesis of stock returns even when GARCH effects were accounted for. Many studies have found empirical regularities that are contrary to the efficient market hypothesis. For example, the monthly, weekly and daily returns on stocks tend to exhibit discernable patterns, such as seasonal affects, month of the year affect, day of the week affect, hourly affect etc. In case of Pakistan’s stock markets too such affects are identified. Such as the Ramadan affect [see Hussain and Uppal (1999)], seasonal effects and day of the week affect. Further, the wide spread use of “technical analysis” among stock traders and their ability to predict to some extent the direction of movements in the prices of individual stocks over medium term testifies to the existence of patterns and seasonal trends.

Reaction of Stock Prices to Dividend Announcements and Market Efficiency in Pakistan

“…Husain (1998,1999), Chakraborty (2006), and Ali and Akbar (2009) are a few of the studies that investigate the weak form of market efficiency in the Pakistani equity market. Ali and Mustafa (2001) examine the semistrong form of market efficiency in the Karachi Stock Exchange (KSE) by analyzing public news in two daily newspapers and the changes in trade volume and stock returns. They conclude that public information did not play an important role in the determination of stock returns since stock returns appeared more sensitive to private information.…”

Calendar anomalies: Review of literature

“…However, the indings of these studies were mixed. The semi strong form of EMH has been tested and mixed indings were reported (Ali et al, 2001;Hussin et al, 2010;Hsu and Utami, 2016;Khan and Ikram, 2010). Likewise, previous research has tested the strong form of ef icient market hypothesis (Finnerty, 1976;Rozeff and Zaman, 1988).…”

Oil Price Shocks and Economic Activity: The Asymmetric Cointegration Approach in South Africa

“…Through the use of the unit root test and the GARCH (1, 1), this study showed that these markets are not weak form efficient and do not follow the RWH. Ali and Mustafa (2001), employing the use of correlation coefficient of successive returns, averages, logarithms and regression analysis on daily price data of listed equities, tested this hypothesis in the Pakistani capital market and discovered that information collectively had an effect on stock prices, both negatively and positively. Lo and Mackinlay (1988) variance tests came up with inadequate inferences about the stock price index following a random walk at a fixed significance level.…”