The Weak-Form Efficiency of The GCC Markets

Topics: Stock market, Stock exchange, Financial markets Pages: 23 (7334 words) Published: May 18, 2009
An Empirical Analysis on The Weak-Form Efficiency of The GCC Markets Applying Selected Statistical Tests Rengasamy Elango, Mohammed Ibrahim Hussein This paper tests for market efficiency across the seven stock markets in the GCC (Gulf Co-operation Council) countries. The GCC countries, of late, have been striving to strengthen their capital markets by introducing various innovative changes in relation to listing, regulatory, trading and settlement norms in order to improve transparency and informational efficiency. Using daily indices of the above markets between October 2001 and October 2006 and Kolmogorov –Smirnov test, we find that all the above seven markets reject the null hypothesis that the returns follow a normal distribution. Again, based on runs test for randomness, we find that the hypothesis pertaining to random walk and weak-form efficiency of the GCC markets is rejected for all the seven markets during the study period. This conclusion corroborates with the conclusions of the past studies carried out in GCC context and the developing and underdeveloped markets. The paper reiterates the need for an integrated GCC Stock market. The results and suggestions have wider implications for security analysts, investing community, stock exchanges, and other regulatory authorities in their policy decisions to improve their capital market functioning. Field of Research: Market efficiency, Random Walk, Kolmogorov – Smirnov test, Runs test for Randomness

1. Introduction
Stock markets play a crucial role in cementing the relationship between investors and the corporate sector. In this process, they help mobilizing the savings of people and direct them to the growth of trade, commerce and industrial sectors of an economy. In a nutshell, stock markets play an important role in capital formation and help fuel economic growth in the country. Looking at it from the investors’ point of view, stock market operations are often compared to operations in gambling dens, and the investors look for the right winning strategies applying innumerable techniques and methods (Ranganatham, Madhu Dr Rengasamy Elango, Faculty, Dept. of Business and Accounting, Majan College, (University College), email: drelan63@gmail.com; elango@majancollege.edu.om Dr Mohammed Ibrahim Hussein, Faculty, Dept. of Business and Accounting, Majan College, (University College), email: sumaybilal@yahoo.com; hussain@majancollege.edu.om

Electronic copy available at: http://ssrn.com/abstract=1026569

mathi R, 2005)The ultimate objective, of course, is to beat the market despite the fact that most often investors are guided by the sentiments of faith and phobia. However, rational investors like to play safe and invest their hard-earned money optimally. Those investors look for organized information and logical reasoning backed by scientific methods and techniques. Since the two prime considerations of a judicious investor are the risk and return inherently present in a security, a guidance on choosing the right stock based on a scientific method would be a boon to the investors. Efficient Market Hypothesis (EMH) The principal issue from an academic viewpoint is market efficiency (Fama 1970, 1991). The Efficient Market Hypothesis (EMH) assumes that stock prices adjust rapidly to the new information, and thus, current prices fully reflect all available information. (Fama 1970), formalized the theory, organized empirical evidence and divided the EMH into three sub-hypotheses depending on the information set involved. It is an important concept, both in terms of an understanding of the working of stock and in their performance and contribution to the development of a country’s economy. If the stock market is efficient, the prices will represent the intrinsic values of the stocks and in turn, the scarce savings will be optimally allocated to productive investments in a way that benefits both individual investors and the country economy (Copeland and Weston, 1988). The...

References: Al-Kuqudah K.A 1997, “An empirical testing of the randomness hypothesis in Amman financial market”, Dirasat, Administrative Sciences, Vol;24. No.2 p.535-542 Ang, J and AR Pohlman, 1978, “A note on the price behaviors of Far Eastern Stocks”, Journal of International Business Studies, p.103-107 Blasco, Natividad, Cristina Del Rio and Rafael Santamar a. 1997. The Random walk hypothesis in the Spanish Stock Market: 1980-1992, Journal of Business Finance and Accounting 24;667. August 8, 2006. Butler, K.C and Malaikah, S.J, 1992, “Efficiency and inefficiency in thinly traded stock markets, Kuwait and Saudi Arabia,” Journal of Banking and Finance, Vol:16 pp 197-210 Claessens Stijin, Dasgupta Susmita, and Glen Jack, 1995, “Return behavior in emerging stock market”, The World Bank Economic Review, vol.9, no.1, p.131-151. Compbell, John Y., Andrew W.Lo, and A. Craig Mackinlay 1997. The Econometrics of Financial Markets. Princeton: Princeton University Press. Cootner, P 1962, Stock Prices: Random Vs Systematic Changes”, Industrial Management Review, Vol:3, Spring – pp 24-45. Copeland, T and JF Weston, 1988, Financial theory and corporate policy, 3rd Edition,, NY Addison Wesley Publishing Company Dahel R. and B. Laabas. 1999, “The behavior of stock prices in the GCC markets”,papers_9917:17.,August,13. . Fama E.F, 1991, “Efficiency capital Markets II, Journal of Finance, Vol: 46, 15751617. Fama, 1965, “The behavior of stock market prices”, Journal of Business, Vol:38, pp.34-105 Fama, E 1970, “Efficient capital markets,- A review of theory and empirical work”, Journal of Finance, Vol:25, No.2 (May 1970), pp 383-417. Fama, Eugune F., and Kenneth R.French, 1988, “Permanent and temporary components of stock market prices”, Journal of Political Economy, vol.96, p.246-273.
16
Granger, 1975, “A survey of empirical studies on capital markets”, in E.Elton and M.Gruber eds. International Capital Markets, (North Holland, Amsterdam) pp.3-36. Hair, Anderson, Tatham, Black, 2005, Multivariate Data Analysis, Pearson Education, Second Indian Reprint, Hawinini G, 1984, “European equity markets; price behavior and efficiency”, Monograph series in Finance and Economics, (Soloman Center, New York University) Jennergren, L. and P.Korsvold, 1975, “The non-random character of Norwegian and Swedish Stock market prices” in: E. Elton and M.Gruber. Eds. International Capital Markets (North-Holland, Amsterdam P. 37-54) Kendall, M.G., 1943, The advanced Theory of Statistics, vol.1, London: Griffin. Kendall, M.G., 1953, “The analysis of economic Time-Series”, part 1. Prices, The Journal of the Royal statistical Society, 116, p.11-25. Ko Kwang-Soo and Lee Sang-Bin, 1991, “A comparative analysis of the daily behavior of stock returns: Japan, The US and the Asian NICs”, Journal of Business Finance and Accounting, vol.18(2), p.219-234. Lawrence, Martin M., 1986, “Weak-form efficiency in the Kuala Lumpur and Singapore Stock Markets”, Journal of Banking and Finance, vol.10, p.431445. Lo, A. W., and A.C. Mackinlay, 1988, “Stock market prices do not follow random walks. Evidence from a simple specification test”, Review of Financial Studies, vol.1, p.41-66. Lo, A.W. 1997, “Market efficiency; stock market behavior in theory and practice”. Volume I and II, Chettenham, UK. An Elgar Reference Collection Mookerjee. R and Yu, Q., 1999, “ An empirical analysis of the equity markets in China”, Review of Financial Economics, 8, p 41-60 Nicolaas Groenewold, 1997, “Share market efficiency: Tests using daily data for Australia and New Zealand”, Applied Financial Economics, vol.7, p.645657. Nourredine Khababa, 1998, “Behavior of stock prices in the Saudi Arabian Financial Market: Empirical research findings”, Journal of Financial Management & Analysis, vol.11, Jan-June, p.48-55
17
Osborne, M.F.M., 1962, “Periodic structure In the Brownian motion in the stock prices,” Operation Research, (May/June), p.345-379. Poshakwale S. 1996, “Evidence on the Weak-form efficiency and the day of the week effect in the Indian stock market”, Finance India, vol.10(3), September, p.605-616. Poterba, James M and Lawerence H. Summers, 1988, “Mean-reversion of stock prices”, Journal of Financial Economics, vol.22 p.27-59. Railey, F. and K. Brown, 2003. Investment Analysis and Portfolio Management, 7th Editon, Mason, Ohio: South Weston Thomson. Ranganatham, M and Madhumathi, R, “ Investment Analysis and Portfolio Management”, Pearson Education, Preface, Pearson Education, (Singapore Private Limited, First Indian Print, 2005) Rao N.D., and Shankaraiah, K 2003, “Stock market efficiency and strategies for developing GCC financial Markets:” A case study of Bahrain stock Market”. http://papers.ssrn.com/so13/papers.cfm?abstract_id=410200 Ross-Westerfield-Jaffe: Corporate Finance, Sixth Edition. © The McGraw-Hill Companies, 2002, p.359. Samuelson P.A, 1965, “Proof that properly anticipated prices fluctuate randomly”, Industrial Management Review, Vol: 6, 41-49 Sharma, S.N 2005, “On the non-normality of GCC Stock Markets”. The ICFAI Journal of Applied Corporate Finance, July Issue, p.51-58 Siegel, Sidney, (1956), “Non-Parametric Statistics for Behavioral Sciences”, New York: McGraw-Hill Company Solink, B., 1973, “Note on the validity of the random walk for European stock prices”, Journal of Finance, 28, pp.1151-1159 Stone, BK and Barter, BJ 1979, “The effect of dividend yield on stock returns; Empirical evidence of dividends”, Working Paper, No. E 76-8, Georgia Institute of Technology Urrutia, JL, 1995, “Tests of random walk and market efficiency”, Journal of Financial Research, vol.18, p.299-309. Working H 1934, “A random difference series for the use in the analysis of time – series” Journal of American Statistical Association (March) pp. 11-22.
18
Working, 1960, “Note on the correlation of first differences of averages in a random chain, in Cootner P. ed 1962, The Random Character of Stock Market Prices, MIT Press
19
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Empirical Evidence of Weak Form Stock Market Efficiency Research Paper
  • Testing the Weak Form of Efficiency of Karachi Stock Exchange Essay
  • Efficiency Measures of Capital Market Essay
  • weak form Essay
  • Market Efficiency Research Paper
  • Forms of Markets Essay
  • Packaged Food Market in GCC Essay
  • Essay about Market Efficiency

Become a StudyMode Member

Sign Up - It's Free