Review of evidence concerning the efficiency of the world’s major stock markets
Sufficient attention has been paid to the efficient markets hypothesis for more than 40 years. Many studies have found that the major stock markets are efficient. Three forms of efficiency have been defined, and we review each one in turn. Weak form
According to Neal and McElroy (2004), in a weak-form efficient market, today’s prices fully reflect all information about past share price movement. Share prices are said to follow “a random walk” (Pike and Neale 2006). Empirical studies have used serial correlation, run and filter tests to find evidence of capital markets being weak-form efficient. The evidence from Kendall’s study (1953 cited Watson and Head 2007) testing for any correlation between security price changes at different points in time (serial correlation) and other studies tend to support the random walk hypothesis. Other studies, such as Fama’s (1965) have used run tests to find a link between the direction of price changes and studying the length of the runs of successive price changes of the same sign. Studies using filter tests (e.g. Alexander 1941) seek for any long-term relationships in security price movements by filtering out short-term price changes (Watson and Head 2007). Recent studies such as Megginson’s work (1997) and work by Beechey et al (2000), both cited Watson and Head (2007), also support the efficiency of capital markets. Semi-strong form
Neal and McElroy (2004) define a semi-strong form efficient market as a market where current prices show all publicly available information as well as past share price movements. Several event studies of semi-strong form efficiency search for speed and accuracy of share price reactions to new information. Capital markets are said to be semi-strong form efficient. A study by Fama et al. (1969 cited Watson and Head 2007) of the adjustment of share prices to the release of information about share splits and...
References: Clarke, J., Jandik, T. and Mandelker, G., (2001), “The Efficient Markets Hypothesis”, http://www.e-m-h.org/ClJM.pdf.
Neale & McElroy, (2004), ‘Business Finance A Value-Based Approach’, FT Prentice Hall.
Pike, R. and Neale, B., (2003), ‘Corporate Finance and Investment’, FT Prentice Hall.
Watson, D. and Head, T., (2007), Corporate finance; Principles & Practice’, FT Prentice Hall.
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