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Tests for weak form market efficiency in stock prices: Monte Carlo evidence

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  • Khaled, Mohammed S
  • Keef, Stephen P

Abstract

Efficiency in financial markets is tested by applying variance ratio (VR)tests, but unit root tests are also used by many, sometimes in addition to the VR tests. There is a lack of clarity in the literature about the implication of these test results when they seem to disagree. We distinguish between two different types of predictability, called "structural predictability" and "error predictability". Standard unit root tests pick up structural predictability. VR tests pick up both structural and error predictability.

Suggested Citation

  • Khaled, Mohammed S & Keef, Stephen P, 2011. "Tests for weak form market efficiency in stock prices: Monte Carlo evidence," Working Paper Series 18606, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:18606
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/18606
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    References listed on IDEAS

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    1. Chow, K. Victor & Denning, Karen C., 1993. "A simple multiple variance ratio test," Journal of Econometrics, Elsevier, vol. 58(3), pages 385-401, August.
    2. Zeynel Abidin Ozdemir, 2008. "Efficient market hypothesis: evidence from a small open-economy," Applied Economics, Taylor & Francis Journals, vol. 40(5), pages 633-641.
    3. Vasudeva Murthy & Kenneth Washer & John Wingender, 2011. "Are stock prices in the US nonstationary? Evidence from contemporary unit root tests," Applied Financial Economics, Taylor & Francis Journals, vol. 21(22), pages 1703-1709.
    4. Batool Asiri, 2008. "Testing weak‐form efficiency in the Bahrain stock market," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 3(1), pages 38-53, January.
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