A CROSS-SECTIONAL REGRESSION TEST OF THE MEAN-VARIANCE EFFICIENCY OF AN AUSTRALIAN VALUE WEIGHTED MARKET PORTFOLIO

This paper tests the Mean-Variance efficiency of a value weighted Australian market portfolio using a multivariate cross-sectional regression approach developed by Shanken (1985). This test methodology is sufficiently powerful to reject the null hypothesis that the market portfolio is ex ante Mean-Variance efficient when test assets are constructed on the basis of size (market capitalisation). However, when test assets are constructed on the basis of industry classification the model is unable to reject the Mean-Variance efficiency of the market portfolio. This test statistic provides some useful diagnostics which are examined in the paper.     

TESTING THE PRESENT VALUE MODEL OF EQUITY PRICES FOR THE UK STOCK MARKET

This paper applies present value tests to the UK stock market. Using monthly data from 1965 to 1990 on real equity price and dividend indices, it is found that the restrictions imposed by the present value model on a vector autoregression comprised of the 'spread' between prices and dividends and the change in real dividends can be rejected both for the complete sample period and for a shorter sample which omits the early years of dividend control and the run up to and aftermath of the stock market 'Crash' of October 1987. These tests are supplemented by informal methods for evaluating the 'fit' of the present value model: the observed spread is found to move 'too much', so that deviations from the model are persistent and long-lasting.     

COMPARATIVE EFFICIENCY OF MARKET INDICES: AN EMPIRICAL STUDY

This study ranks eight widely used market indices using two mean-variance efficiency scores developed from Roll's geometric representation of the Shanken's CRS T² test statistic and the likelihood ratio test statistic of Kandel. The results indicate that, over the period of 1973–1982, the CRSP equally weighted, CRSP value weighted, and S&P 500 emerge consistently as the three most efficient indices under all market conditions.     

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.     

THE DETERMINANTS OF MARKET BID ASK SPREADS ON THE AUSTRALIAN STOCK EXCHANGE: CROSS-SECTIONAL ANALYSIS

Prior research into the cost of trading on the Australian Stock Exchange has identified brokerage fees and the bid-ask spread as significant elements of total transaction costs. While an enormous volume of research has examined the determinants of spreads in US markets, no work has so far addressed the issue for the Australian market-place. Given the importance of spreads as a transaction cost, this work redresses this imbalance and at the same time provides evidence on whether alternative market structures underlying different exchanges give rise to differences in the determinants of spreads. Using prior US research as our benchmark, our results suggest that notwithstanding microstructure differences between the Australian and US exchanges, there are three fundamental determinants of spreads that transcend differences in the market-places. These are the level of trading activity, price volatility and stock price levels. Together these three factors account for up to 94% of the total cross-sectional variation in percentage bid ask spreads on the ASX.     

MARKET EFFICIENCY IN DEVELOPING COUNTRIES: A CASE STUDY OF THE NAIROBI STOCK EXCHANGE

This study extends evidence on the efficiency of stock markets in developing countries using data from the Nairobi Stock Exchange (NSE), and also addresses some methodological issues which have contributed to the sparseness of similar studies. Evidence is provided that small markets such as the NSE may provide empirical results consistent with weak-form efficiency. This evidence holds for the NSE irrespective of whether bid-, ask-, or market-price series are used in conducting the study.     

MOVING STOCHASTIC DOMINANCE: AN ALTERNATIVE METHOD FOR TESTING MARKET EFFICIENCY

The purposes of this study are: (1) to propose a more general method—moving stochastic dominance (MSD)—for testing market efficiency, (2) to compare and contrast the MSD method with the cumulative average residual (CAR) risk-return analysis, and (3) to illustrate the MSD methodology on a sample of stock splits. The constant CAR analysis results are consistent with previous studies. The moving CAR results are in conflict with previous studies and indicate that investors are worse off after a stock split irrespective of the subsequent dividend change. The MSD results indicate that investors are approximately equally well off irrespective of the subsequent dividend change.     

A NOTE ON THE BEHAVIOR OF SECURITY RETURNS: A TEST OF STOCK MARKET OVERREACTION AND EFFICIENCY

Researchers have debated stock market efficiency for years and have found several apparent anomalies, among them the overreaction investment strategy. In a sample of virtually all AMEX and NYSE stocks over twenty-one years, it is demonstrated that abnormal returns earned in one year are positively related to the abnormal returns earned in the next year. This evidence is contrary to the overreaction investment philosophy.