Ebook Efficiency in Emerging Markets - Evidence from the Emirates Securities Market
The analysis of the efficient market hypothesis has attracted a great deal of interest in recent time. The efficient market hypothesis is based on the assumption that at any given time, prices of stocks fully reflect all the available information related to them. According to this, a stock market is seen as more efficient if market relevant information is incorporated into assets prices. Under fully efficient markets, past information should not affect returns in present period. In other words, the “efficient stock markets do not allow investors to earn more above-average returns without accepting above verage risks” (Malkiel 2003, p. 60). It is believed to be an application of rational expectation theory to the pricing of stocks.
A very important issue to be highlighted at this stage is that market efficiency does not mean that the market price of a stock should equal the true value of the stock. What it means is that errors in the market price, i.e. over or under valued of the true value, should be unbiased and randomly deviated. Based on this argument, the existence of random deviation prevents investors from finding those over or under valued stocks.
An important implication of the efficient market hypothesis (EMH) is that stock prices should follow a random walk, where the future price changes should be - for all practical purposes - random and therefore unpredictable (Mishkin, 1998, p. 173). A consequence of this is that stock market return can not be predicted from previous price changes. The random walk hypothesis is associated with the weak form of the efficient market hypothesis. This asserts that all the information contained in the history of yesterday’s stock prices are reflected in today’s stock prices.
The main objective of this paper is to test the random walk hypothesis on Emirates securities market. For this purpose, the study will apply two approaches. The first approach is the conventional unit root tests such as Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests. The second approach is Perron (1997) which tests the unit root hypothesis in the presence of unknown structural break. Although the subject of random walk hypothesis has been studied before, to the extent of our knowledge no previous study has conducted unit root tests in the presence of structural change to examine the random walk hypothesis in the Emirates Securities Market.
This paper is organized as follows. Section 2 presents the literature review on efficient market hypothesis in the context of stock markets. An overview of the Emirates stock market is presented in Section 3. Section 4 outlines the data and methodology used in this study. Section 5 presents the test statistics and interprets the empirical results. Finally, Section 6 provides conclusion of the study.
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