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The size effect and the random walk hypothesis: evidence from the London Stock Exchange using Markov Chains

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  • T. C. Mills
  • J. V. Jordanov

Abstract

This paper examines the predictability of size portfolio returns using a new database constructed from the London Stock Exchange for the period 1985-1995. Predictability of returns, both adjusted and unadjusted for risk, are examined and, because evidence of nonlinearity and nonnormality is found in these series, conventional autocorrelation analysis is supplemented with analysis using Markov chain processes. It is found that predictabilities appear for the largest size portfolios rather than the smallest, so that, although a size effect remains in the market, it is rather different to that which is usually thought to hold.

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  • T. C. Mills & J. V. Jordanov, 2003. "The size effect and the random walk hypothesis: evidence from the London Stock Exchange using Markov Chains," Applied Financial Economics, Taylor & Francis Journals, vol. 13(11), pages 807-815.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:11:p:807-815
    DOI: 10.1080/0960310032000116224
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    References listed on IDEAS

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    1. repec:bla:econom:v:63:y:1996:i:251:p:369-82 is not listed on IDEAS
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    Cited by:

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    2. Ikram ul Haq & Kashif Rashid, 2014. "Stock Market Efficiency and Size of the Firm: Empirical Evidence from Pakistan," Oeconomics of Knowledge, Saphira Publishing House, vol. 6(1), pages 10-31, March.
    3. Alagidede, Paul, 2008. "Month-of-the-year and pre-holiday seasonality in African stock markets," Stirling Economics Discussion Papers 2008-23, University of Stirling, Division of Economics.
    4. Flavio Ivo Riedlinger & João Nicolau, 2020. "The Profitability in the FTSE 100 Index: A New Markov Chain Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(1), pages 61-81, March.
    5. Charles Ka Yui Leung & Patrick Wai Yin Cheung & Erica Jiajia Ding, 2008. "Intra-metropolitan Office Price and Trading Volume Dynamics: Evidence from Hong Kong," International Real Estate Review, Global Social Science Institute, vol. 11(2), pages 47-74.
    6. Claudio Bonilla & Rafael Romero-Meza & Melvin Hinich, 2006. "Episodic nonlinearity in Latin American stock market indices," Applied Economics Letters, Taylor & Francis Journals, vol. 13(3), pages 195-199.
    7. Samer Al-Rjoub & Oscar Varela & M. Kabir Hassan, 2005. "The size effect reversal in the USA," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1189-1197.
    8. B. Jirasakuldech & Riza Emekter & Unro Lee, 2008. "Business conditions and nonrandom walk behaviour of US stocks and bonds returns," Applied Financial Economics, Taylor & Francis Journals, vol. 18(8), pages 659-672.

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