A few studies conducted on the test of efficient market hypothesis (EMH) in emerging markets compared to the volume of studies published on the developed market. It is generally assume that the emerging markets are less efficient than the developed market. The definition of emerging market highlighted on the growth potentiality as well as rapid growth of size of the market. However, it is not unlikely that the market participants are not well informed and behaving irrational compare to well organize markets. The causes of lack of financial development especially in capital markets are due to certain market imperfection such as transaction costs, lack of timely information, cost of acquiring new information, and possibly greater uncertainty about the future (Taylor, 1956; Goldsmith, 1971; Mason, 1972; Wai and Patrick, 1973).[1] The different researchers define the emerging market in different ways. According to Samuel’s (1981),[2] who asserts the nature of the emerging market in terms of information availability where prices cannot be assumed to fully reflect all available information. It cannot be assumed that investors will correctly interpret the information that is released. The corporation has greater potential to influence its own stock market price and there is a greater possibility that its price will move about in a manner not justified by the information available.


And with this open market policy, in the emerging markets speculations are common; large investors can easily speculate the market. As a less organized market without market makers and timely available information, there is always remain as a possibility to make profit by large investors and insiders. The ability to predict stock price changes based on a given set of information lies behind the notion of stock market efficiency. The lower the market efficiency, the greater the predictability of stock price changes.


The Weak Form tests measures whether past series of share prices or returns can be used to successfully predict future share prices or returns. The major empirical investigation of the above test measures the statistical dependence between price changes. If no dependence is found such as when price changes are random, then this provides evidence in support of the WFEMH, which implies that no profitable investment trading strategy can be derived based on past prices. On the other hand, if dependence is found, for example, price increases generally followed by price increases in the next period and vice versa; clearly indicates that this can be the basis of profitable investment rule and violates the assumption of the Weak Form. However, whether any trading rule is profitable depends largely on the operating cost such as brokerage cost, interest cost, trading settlement procedure and on whether transactions can be made at the exact prices quoted in the market.


In general, the results of previous research evidence that the market of developed economies are generally weak form efficient. That means the successive returns are independent and follow random walk (Fama, 1965,1970).[3]  On the other hand, the research findings on the market of developing and less developed countries are controversial. Some of the researcher find evidence of weak form efficiency and cannot reject the random-walk hypothesis in emerging markets (Branes, 1986; Dickinson and Muragu, 1994; Urrutia, 1995).[4] Whereas the others find the evidence of non-randomness stock price behavior and reject the weak-form efficiency in the developing and emerging markets (Poshakwale. S,1996 and Nourredine Khaba, 1998).[5]


The early studies on testing weak form efficiency started on the developed market, generally agree with the support of weak-form efficiency of the market considering a low degree of serial correlation and transaction cost (Cootner, 1962; Osborne, 1962; Fama, 1965).[6] All of the studies support the proposition that price changes are random and past changes were not useful in forecasting future price changes particularly after transaction costs were taken into account. However, there are some studies, which found the predictability of share price changes (Fama and French, 1988; Poterba and Summers, 1988)[7] in developed markets but they did not reached to a conclusion about profitable trading rules.


Poterba and Summers (1988)[8] suggest that noise trading, trading by investors, whose demand for shares is determined by factors other than their expected returns provides a plausible explanation for the transitory component in stock prices. And they suggest constructing and testing theories of noise trading as well as theories of changing risk factors could account for the characteristics of stock returns auto-correlogram they found. Fama and French (1988)[9] conclude that auto-correlation’s may reflect market inefficiency or time-varying equilibrium expected returns generated by rational investor behavior and neither view suggests, however, the patterns of auto-correlation should be stable for a long sample period. Hudson, Dempsey and Keasey (1994)[10] found that the technical trading rules have predictive power but not sufficient to enable excess return in U.K market. Similarly, Nicolaas (1997)[11] also conclude that past returns have predictive power in Australian market but the degree of predictability of return is not so high.


Overall, the empirical studies on developed market shows no profitability from using past records of price series supports the weak-form efficiency of the EMH in general. On the other hand, the research findings of weak-form efficiency on the market of developing and less developed markets are controversial. Most of the less developed market suffers with the problem of thin trading. In addition, in smaller markets, it is easier for large traders to manipulate the market. Though it is generally believe that the emerging markets are less efficient, the empirical evidence does not always support the thought. There are two groups of findings; the first group find weak-form efficiency in developing and less developed markets are Branes (1986), (on the Kuala Lumpur Stock Exchange); Chan, Gup and Pan, 1992, (in major Asian markets); Dickinson and Muragu, 1994 (on the Nairobi Stock Exchange) and Ojah and Karemera 1999, (on the four Latin American countries market) despite the problems of thin trading. [12]


On the other hand, the latter group, who evidence that the market of developing and less developed markets are not efficient in weak-sense are Cheung, Wong and Ho, (1993),[13] on the stock market of Korea and Taiwan; in a world bank study by Claessens, Dasgupta and Glen (1995),[14] report significant serial correlation in equity returns from 19 emerging markets and suggest that stock prices in emerging markets violates weak form EMH; similar findings are reported by Harvey (1994) for most emerging markets. Nourrrendine Kababa (1998)[15] has examined the behavior of stock price in the Saudi Financial market seeking evidence that for weak-form efficiency and find that the market is not weak-form efficient. He explained that the inefficiency might be due to delay in operations and high transaction cost, thinness of trading and illuiquidity in the market. Roux and Gilberson (1978) and Poshakwale S. (1996)[16] find the evidence of non-randomness stock price behavior and the market inefficiency (not weak-form efficient) on the Johannesburg stock Exchange and on the Indian market.



 


[1] Taylor, Basil, (1969) Investment: Art, Science or what? Lioyds bank, vol. 91, January, pp.10-21; Goldsmith, R. W. (Sept 1971) Capital Markets and Economic Development. National symposium on Development of Capital Markets, September 1971; Mason, R. T. (1972) The creation of risk aversion by imperfect Markets. American economic Review, vol.62; Wai, U.T. and Patrick, H.T. (1973) Stock and Bond issues and Capital Markets in Less Developed Countries. International Monetary Fund Staff papers, 302.


 


[2] Samuels, J.M and N.Yacout (1981) Stock Exchanges in Developing Countries. Savings and development no.4.


[3] Supra Fama (1965, 1970)


[4] Branes Paul, (1986) Thin trading and stock market efficiency: A case of the Kuala Lumpur Stock Exchange. Journal of Business Finance & Accounting , volume 13(4) winter , pp. 609-617; Dickinson and Muragu, S. (1994) Market Efficiency in Developing Countries: A case study of the Nairobi Stock Exchange. Journal of Business Finance & Accounting, volume 21(1) January, pp. 133-150; Urrutia, J L , (1995) Tests of random walk and market efficiency. Journal of Financial.


[5] Poshakwale S. (1996)  Evidence on the Weak-form efficiency and the day of the week effect in the Indian Stock Market. Finance India, Volume 10(3), September, pp. 605-616; Nourredine K. (1998) Behavior of stock prices in the Saudi Arabian Financial Market: Empirical research findings. Journal of Financial Management & Analysis, Volume 11(1) Jan-June, pp. 48-55.


 


[6] Supra Cootner; Supr Osborne; Supra Fama (1965)


[7] Supra Fama and French; Supra Poterba and Summers


 


[8] Supra Poterba and Summers


[9] Ibid.


[10] Hudson, R., Dempsey, M. and Keasey, K. (1994) A note on the weak-form efficiency of capital markets: The application of simple technical trading rules to UK Stock prices-1935 to1994. Journal of Banking & Finance, vol.20, Pp. 1121-1132.


 


[11] Nicolaas G. (1997) Share market efficiency: Tests using daily data for Australia and New Zealand. Applied Financial Economics, vol.7. Pp.645-657.


 


[12] Supra Branes; Supra Dickenson; Ojah Kalu and Karemera (1999) Random walks and Market efficiency Tests of Latin Amaeracan Emerging Equity Markets: A Revisit. The Financial Review , volume 34, pp. 57-72.


 


[13] Cheung, Yan –Leung, Wong Kie-Ann, and Ho Yan-Ki, (1993) The pricing of risky assets in two emerging Asian markets- Korea and Taiwan. Applied Financial Economics 3, issue 4, December, pp.315-324.


[14] Claessens Stijin, Susmita, D. and Jack, (1995) Return behaviour in emerging Stock Market. The world Bank economic Review, vol.9, no.1, Pp. 131-151.


 


[15] Supra Nourrrendine


[16] Roux and Gilbertson, (1978) The behavior of share prices on the Johannesburg Stock Exchange. Journal of Business Finance and Accounting , Volume5(2), pp. 223-232; Supra Poshakwale;


 




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