Random Walks and Market Efficiency Tests of Latin American Emerging Equity Markets: A Revisit

The few existing studies on equity price dynamics and market efficiency for Latin American emerging equity markets show conflicting results. This study uses multiple varianceratio and auto-regressive fractionally integrated moving-average tests and new data (U.S. dollar-based national equity indices for the 1987–1997 period) to clarify these results. Documented evidence shows that equity prices in major Latin American emerging equity markets — Argentina, Brazil, Chile and Mexico—follow a random walk, and that they are, generally, weak-form efficient. In sum, therefore, the evidence suggests that international investors in these markets cannot use historical information to design systematically profitable trading schemes because future long-term returns are not dependent on past returns.     

Random walk theory and the weak-form efficiency of the US art auction prices

We perform variance ratio tests based on non-parametric methods to detect the size of the random walk component of the US art auction prices. The past 134 years of the US art prices exhibit large transitory component (72%) and based on this, the random walk hypothesis does not hold. However, possibly due to sparse data before 1935 or due to institutional changes of the art market after World War II, we detect structural breakpoints and find that the random walk hypothesis and the weak-form efficiency of the US art market cannot be rejected at least for the past 64 years.     

Testing weak-form market efficiency: Evidence from the Istanbul Stock Exchange

The random-walk version of the efficient market hypothesis is tested for the Istanbul Stock Exchange (ISE) using its composite, industrial, and financial index weekly closing prices. The results obtained from three of the tests indicate that all three series are a random walk, but a nonparametic test provides some evidence against a random walk.     

Mean reversion versus random walk in G7 stock prices evidence from multiple trend break unit root tests

This paper provides evidence on the random walk hypothesis in G7 stock price indices using unit root tests which allow for one and two structural breaks in the trend. Of the seven countries we find, at best, evidence of mean reversion in the stock price index of Japan. Thus, overall, our results support the random walk hypothesis. We also consider the implications of the identified structural breaks for movement in stock prices over time. Our main conclusion from this exercise is that the second break in stock prices has had a detrimental effect on movements in stock prices in the G7 countries.     

Temporary components of stock returns: What do the data tell us?

Within the past few years several articles have suggested thatreturns on large equity portfolios may contain a significantpredictable component at horizons 3 to 6 years. Subsequently,the tests used in these analyses have been criticized (appropriately)for having widely misunderstood size and power, rendering theconclusions inappropriate. This criticism however has not focusedon the data, it addressed the properties of the tests. In thisarticle we adopt a subjectivist analysis - treating the dataas fixed - to ascertain whether the data have anything to sayabout the permanent/temporary decomposition. The data speakclearly and they tell us that for all intents and purposes,stock prices follow a random walk.     

Are Stock Returns Predictable? A Test Using Markov Chains

This paper uses a Markov chain model to test the random walk hypothesis of stock prices. Given a time series of returns, a Markov chain is defined by letting one state represent high returns and the other represent low returns. The random walk hypothesis restricts the transition probabilities of the Markov chain to be equal irrespective of the prior years. Annual real returns are shown to exhibit significant nonrandom walk behavior in the sense that low (high) returns tend to follow runs of high (low) returns in the postwar period.     

Valuation of American Futures Options: Theory and Empirical Tests

This paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the S&P 500 equity futures option market. The American futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in-the-money and to the option's time to expiration. The models are also shown to generate abnormal risk-adjusted rates of return after transaction costs. The joint hypothesis that the American futures option pricing models are correctly specified and that the S&P 500 futures option market is efficient is refuted, at least for the sample period January 28, 1983 through December 30, 1983.     

Random walk versus breaking trend in stock prices: Evidence from emerging markets

This paper investigates whether stock-price indexes of seventeen emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a test that can account for structural breaks in the underlying series and is more powerful than standard tests. We find that for fourteen countries, stock prices exhibit structural breaks. Furthermore, for ten countries, the null hypothesis of a random walk can be rejected at the one or 5% significance level. Our results indicate that ignoring structural breaks that arise from the liberalization of emerging markets can lead to incorrect inference that these indices are characterized by random walks, and are consistent with the points made by Bekaert et al. [J. Int. Money Finan. 21 (2002) 295]. Our findings hold true regardless of whether stock indexes are denominated in US dollar terms, in local currencies terms, or in real terms.     

On Testing the Random-Walk Hypothesis: A Model-Comparison Approach

The main intention of this paper is to investigate, with new daily data, whether prices in the two Chinese stock exchanges (Shanghai and Shenzhen) follow a random‐walk process as required by market efficiency. We use two different approaches, the standard variance‐ratio test of Lo and MacKinlay (1988) and a model‐comparison test that compares the ex post forecasts from a NAÏVE model with those obtained from several alternative models: ARIMA, GARCH and the Artificial Neural Network (ANN). To evaluate ex post forecasts, we utilize several procedures including RMSE, MAE, Theil's U, and encompassing tests. In contrast to the variance‐ratio test, results from the model‐comparison approach are quite decisive in rejecting the random‐walk hypothesis in both Chinese stock markets. Moreover, our results provide strong support for the ANN as a potentially useful device for predicting stock prices in emerging markets.     

Internationally cross-listed stock prices during overlapping trading hours: price discovery and exchange rate effects

We analyze exchange rates along with equity quotes for 3 German firms from New York (NYSE) and Frankfurt (XETRA) during overlapping trading hours to see where price discovery occurs and how stock prices adjust to an exchange rate shock. Findings include: (a) the exchange rate is exogenous with respect to the stock prices; (b) exchange rate innovations are more important in understanding the evolution of NYSE prices than XETRA prices; and (c) most (but not all) of the fundamental or random walk component of firm value is determined in Frankfurt.     

Speculative bubbles in emerging stock markets and macroeconomic factors: A new empirical evidence for Asia and Latin America

The purpose of this study is firstly to test for the existence of periodically collapsing stock price bubbles in Asian and Latin American emerging stock markets for the period 1990–2009. We use the new non-cointegration test developed by Taylor and Peel (1998) with the Residuals-Augmented Least Squares (RALS) method of Im (1996) and Im and Schmidt (2008) for monthly data of price indexes and dividends. The results show that the hypothesis of formation of bubbles cannot be rejected for all of the studied emerging stock markets. This evidence implies that the co-integration relation between the prices and the dividends is not always supported, indicating that the stock prices do not reflect their fundamental values in the emerging stock markets. We then link speculative bubbles with macroeconomic and financial factors, which is an interesting contribution of this study. The degree of equity market openness is found to be the key factor, positively related to the formation of speculative bubbles in these markets.     

Financial liberalization and stock market efficiency: an empirical examination of nine emerging market countries

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from nine different countries, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient prior to the actual liberalization.     

AN EMPIRICAL EXAMINATION OF FINANCIAL LIBERALIZATION AND THE EFFICIENCY OF EMERGING MARKET STOCK PRICES

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.     

Evaluating the Forecast Accuracy of Emerging Market Stock Returns

This paper analyzes the forecast performance of emerging market stock returns using standard autoregressive moving average (ARMA) and more elaborated autoregressive conditional heteroskedasticity (ARCH) models. Our results indicate that the ARMA and ARCH specifications generally outperform random walk models. Models that allow for asymmetric shocks to volatility are better for in-sample estimation (threshold autoregressive conditional heteroskedasticity for daily returns and exponential generalized autoregressive conditional heteroskedasticity for longer periods), and ARMA models are better for out-of-sample forecasts. The results are valid using both U. S. dollar and domestic currencies. Overall, the forecast errors of each Latin American market can be explained by the forecasts of other Latin American markets and Asian markets. The forecast errors of each Asian market can be explained by the forecasts of other Asian markets, but not by Latin American markets. Our predictability results are economically significant and may be useful for portfolio managers to enter or leave the market.     

The behavior of secondary market prices of LDC syndicated loans

The paper investigates the time series properties and the efficiency of the secondary market for LDCs syndicated loans. The data corresponding to weekly secondary market prices for 26 LDCs syndicated loans are divided into two subperiods: from July 1988 to June 1990 and from July 1990 to May 1992. Tests of the random walk hypothesis are conducted based on the Augmented Dickey-Fuller methodology and the variance-ratio test of Lo and MacKinlay. The efficiency of the market is tested by means of filter rule tests. The empirical findings suggest that the secondary market for LDCs syndicated loans has become more efficient over time and that loan prices follow random walks.     

Stock Exchange Reforms and Market Efficiency: the Italian Experience

This paper examines whether the reforms introduced by the Italian Stock Exchange from 1991 to 1994 (creation of specialised intermediaries, obligation to trade on the official markets, screen-based trading and cash settlement) did increase market efficiency. The issue is addressed using both the traditional information efficiency model, which tests market efficiency by verifying the predictability of prices conditional on some information subset, and a microstructure approach that measures efficiency as the distance of the price movements from their efficient components, represented by a random walk process. The joint analysis of daily and intraday data on prices and volumes validates the hypothesis that most of the reforms have increased market efficiency over the sample period, except for cash settlement, which appears to have substantially reduced it.     

Short sale constraints: the impact on the return distribution

This paper tests empirically Hong and Stein's theoretical finding, that in an environment of short sale constraints, investor disagreement over future equity prices leads to negatively skewed return distributions. This study uses data from the Indian equity market to examine the third and fourth moments of the return distribution. The skewness of the return distribution is estimated both from realized returns and option prices. Empirical results provide partial supportive evidence for Hong and Stein's hypothesis.     

Non-linear dynamics in international resource markets: Evidence from regime switching approach

This paper examines the nonstationary and nonlinear features of the non-renewable resource markets: the crude oil (US West Texas Intermediate and UK Brent), bituminous coal and natural gas markets. In particular, we achieve this goal by using the Markov switching unit root regression. This approach is attractive because it allows price to switch between stationary and nonstationary regimes (partial nonstationarity). It also allows price to switch between two stationary regimes (varied stationarity) or to switch between two nonstationary regimes (varied nonstationarity). The results of a range of non-linear tests show that the independently and identically distributed (i.i.d.) hypothesis or the random walk hypothesis is untenable for the non-renewable resource prices. The results from the Markov regression indicate that, in the cases of US West Texas Intermediate, UK Brent as well as bituminous coal, prices are characterized by the local nonstationarity in both regimes, and therefore varied nonstationarity is sustained. The price of natural gas is characterized by partial nonstationarity, indicating that this market is inconsistent with the efficient market.     

On the long-term or short-term dependence in stock prices: Evidence from international stock markets

This study examines the short- and long-term dependence in the United States and 21 international equity market indexes. Two heteroscedastic-robust testing methods, the modified rescaled range analysis and the rescaled variance ratio test, are employed to test for the existence of dependence. The evidence consistently reveals the absence of long-term dependence in these 22 stock returns indexes. The random walk hypothesis for most, but not all, stock returns indexes is not rejected. When the random walk hypothesis is rejected, the evidence supporting the rejection is weak and the stochastic dependence occurs mainly in short-horizon, rather then long-horizon holding period returns.     

INFORMATION TRANSMISSION IN THE SHANGHAI EQUITY MARKET

We examine market efficiency and the price-volume relation in Class A and Class B shares on the Shanghai exchange relative to the U. S. equity market. Variance ratios and runs tests for market efficiency support the hypothesis that both Class A and Class B markets follow a random walk. In addition, the augmented Dickey-Fuller test supports the null hypothesis that the Shanghai market follows a random-walk process with drift. We also find a significantly positive relation between changes in volume and absolute price returns in both Class A and Class B shares, which is consistent with studies on U.S. equity markets. However, when using signed returns, our results are stronger than most U.S. studies on price-volume relations. We find no significant difference between the price-volume correlations in Class A and Class B shares. However, the price-volume correlations in both Class A and Class B shares are significantly stronger than the price-volume correlation in the U.S. market. This suggests volume may be more important to information transmission in China than in the U. S. markets.