Validity of Weak-Form Market Efficiency in Central and Eastern European Countries (CEECs): Evidence from Linear and Nonlinear Unit Root Tests

Abstract

This paper aims to focus weekly stock market prices from the CEECs (Lithuania, Hungary, Romania, Croatia, Slovenia, Poland, Bulgaria, the Slovak Republic, Latvia, Estonia, and the Czech Republic) markets for evidence of weak-form market efficiency. This is complemented by the use of comprehensive unit root tests to test for abnormal return behaviour in these stock markets. For this purpose, Harvey et al. (2008) linearity test was applied in order to determine the characteristics of the series. The results indicate that the series with linear characteristics are Slovenia, Bulgaria, the Slovak Republic, Estonia, and the Czech Republic and those with non-linear characteristics are Lithuania, Hungary, Romania, Croatia, Poland, and Latvia. Then, in order to examine the weak-form market efficiency, DF-GLS (1996), Phillips-Perron (1988) and Lee-Strazicich (2003) unit root tests are applied to linear series and Kapetanios et al. (2003) and Kruse (2011) tests were applied to nonlinear series. The linear and nonlinear unit root tests evidence that all the selected stock markets in CEECs have a unit root, in other words, are non-stationary. In the period analyzed, the results suggest that the weak-form efficient market hypothesis holds in the CEECs. Accordingly, the results indicate support for the validity of the random walks hypothesis in all the selected stock markets in CEECs. It means that investors should not be able to earn abnormal returns by carrying out the same analysis and analysing historical prices in CEECs. The finding of weak-form market efficiency has notable implications from the point of capital allocation, stock price predictability, and the influence of shocks to stock prices.

Testing Market Efficiency: The Road to Intrinsic Valuation

“…Hájek, 2007), our results are quite opposite to the findings from most of the studies which examined both developed and emerging European markets (Worthington and Higgs, 2004;Hasanov and Omay, 2007;Pele and Voineagu, 2008;Borges, 2010;Narayan and Smyth, 2007;Dragota and Tilica, 2014;Hepsag and Akcali, 2015;Anlas and Toraman, 2016;Tokić et al, 2018). However, the previous research tested the weak form of the EMH using different methods which were mainly based on the unit root analysis (Erdas, 2019), in which stationarity represented the rejection criterion of the null hypothesis that the market is efficient in the weak form. Our opinion is that the unit root analysis is incomplete and that researchers should not rely only on this approach when testing the EMH.…”

Return and volatility spillovers between South African and Nigerian equity markets

“…To remedy this shortcoming, this paper models the returns of UK FTSE 100 based on efficient market hypothesis (see Equation 2) while exogenously affecting the South African and Nigerian stock market returns. Modelling stock returns under weak efficient market hypothesis is well documented in financial econometrics literature (see Erdas, 2019).…”

A nonlinear autoregressive distributed lag approach to remittances and access to financial inclusion in Jordan

“…It is highly recommended that the linearity feature of the series should be examined before performing the unit root tests. Using a unit root test for exploring the structure of the series is very important and crucial for the reliability and interpretation of the estimation results (Mehmet 2019). Among several tests for linearity available in the literature, this study uses the BDS linearity test developed by Brock et al (1996) and the Jarque-Bera on the individual series tests were applied to test for the presence of nonlinearity in the relationship between remittances and access to financial inclusion.…”