Empirical investigation of efficient market hypothesis in vietnam stock market

Keywords:efficient market hypothesis, randomness, calendar effect... Tableofcontents Acknowledgement...i Abstract...ii Tableofcontents...iii Listoftables...v Abbreviations...vi 1... CONC

MINISTRYOFEDUCATIONANDTRAININGUNIVERSITYO FECONOMICSHOCHIMINHCITY

MINISTRYOFEDUCATIONANDTRAININGUNIVERSITYO FECONOMICSHOCHIMINHCITY

Acknowledgement

Iw o u l d l i k e toe x p r e s s myh e a r t f e l t g r a t i t u d e a n d d e e p e s t a p p r

e c i a t i o n t o myresearchSupervisor,Dr.VoXuanVinhforhispreciousguidance,shareofexperience,c e a s e l e s s e n c o u r a g e m e n t a n d highlyvaluable

a d v i c e a n d c o m m e n t s throughoutthecourseofmyresearch

Iwouldliketothankmanyofmyfriendsinourgroupfromebankingclass,whoh

av e beensharingexperience duringdoingresearch:Ms.NguyenThiKimNgan,Ms.TranThuyHuyen,Ms.DoNgocAnh,Mr.TaThuTin,Ms.PhamThiTuye

tT r in h

MyspecialgratitudeisextendedtoallinstructorsandstaffatFacultyofBankingan dFinancePostgraduateFaculty,UniversityofEconomicsHoChiMinhCity(

U E H ) fortheirsupportandthevaluableknowledgeduringmystudyinUEH

Finally,thedeepestandmostsinceregratitudegoestomyparents,mysistersfo

rt h e i r l o v e a n d s u p p o r t F u l f i l l i n g t h i s g o a l w o u l d noth a v e b e e n p o s s i b l e

w i t h o u t them

Abstract

ThisresearchexaminestheefficiencyofVietnamstockmarketatweakformlevelbyusingdailyandweeklyobservationsofmarketindexandeightselectedstocksofr e a l e s t a t e

a n d s e a f o o d p r o c e s s i n g c o m p a n i e s f o r thep e r i o d from2 0 0 7 t o 2 0 1 0 Parametricandnonparametrictestsincluding

autocorrelationtest,runtest,variancer a t i o test,regressiontest,ARCH,GARCH(1,1)havebeenemployedinthisstudy.A l l tests’resultsfailtosupportthehypothesisofweakformefficiencywithdailyd a t a , evenincase,returnsareadjustedforthintrading.However,withweeklydata,r e s u l t s o b t a i n e d f r o m r u n t e s t a n d a u t o c o

r r e l a t i o n t e s t d o n o t c o m p l e t e l y r e j e c t hypothesisofweakformefficiencywhileresultgivenfromvarianceratiotestfullyp r o v i d e s e v i d e n c e a g a i n s t a r a

n d o m w a l k B e s i d e s that,t h e f i n d i n g s o f n o c l e a r c a l e n d a r effectbyexaminingdayofweekeffectalsogivetheevidencethatevenift h e anomaliesexistedinthesampleperiod,thepractitionerswhoimplementstrategiestot a k e a d v a n t a g e

o f a n o m a l o u s b e h a v i o r c a n c a u s e t h e a n o m a l i e s t o di sappear

Keywords:efficient market hypothesis, randomness, calendar effect

Tableofcontents

Acknowledgement i

Abstract ii

Tableofcontents iii

Listoftables v

Abbreviations vi

1 INTRODUCTION 1

2 LITERATUREREVIEW 5

2.1 ThetheoryofEfficiencyMarketHypothesis 5

2.2 ReviewofLiteratureonWeakFormMarketEfficiency 7

2.2.1 Evidencefromdevelopedmarkets 8

2.2.2 Evidencefromdevelopingmarkets 10

3 DATAA N D M E T H O D O L O G Y 14

3.1 DataDescription 14

3.2 Methodology 17

3.2.1 AutoCorrelationTest 17

3.2.2 Runtest 19

3.2.3 Varianceratiotest 20

3.2.4 Calendareffect 23

3.2.5 Thintradingadjustment 25

3.2.6 Robustnesscheck 26

4 EMPIRICALRESULT 27

4.1 AutocorrelationTest 27

4.2 Runstest 34

4.3 Varianceratiotest 38

4.4 Dayofweekeffects 44

5 CONCLUSION 48

REFERENCES 50

Appendix 56

TableA.1.Summaryresultsofalltestsfordailyreturnsin2007 56

TableA.2 Summary resultsof a l l testsfor thintradingadjusteddaily returnsi n2 0 0 7 56

TableA.3.Summaryresultsofalltestsfordailyreturnsin2008 57

TableA.4 Summary resultsof a l l testsfor thintradingadjusteddaily returnsi n2 0 0 8 57

TableA.5.Summaryresultsofalltestsfordailyreturnsin2009 58

TableA.6 Summary resultsof a l l testsfor thintradingadjusteddaily returnsi n2 0 0 9 58

TableA.7.Summaryresultsofalltestsfordailyreturnsin2010 59

TableA.8 Summary resultsof a l l testsfor thintradingadjusteddaily returnsi n2 0 1 0 59

Listoftables

Table3.1.Descriptivestatisticsofdailyreturn 15Table3.2.Descriptivestatisticsofweeklyreturn 15Table4 1 R e s u l t s o f a u t o c o r r e l a t i o n c o e f f i c i e n t s a n d L j u n g -

B o x Q s t a t i s t i c s f o r dail y returns 29Table4.2.ResultsofautocorrelationcoefficientsandLjung-

BoxQstatisticsforthint r a d i n g adjusteddailyreturns 31Table4 3 R e s u l t s o f a u t o c o r r e l a t i o n c o e f f i c i e n t s a n d L j u n g -

B o x Q s t a t i s t i c s f o r weekly returns 32Table4.4.ResultsofautocorrelationcoefficientsandLjung-

BoxQstatisticsforthint r a d i n g adjustedweeklyreturns 33Table4.5.Resultsofruntestfordailyprice&return 36Table4.6.Resultsofruntestforw e e k l y price&return 37Table4.7.Varianceratiotestresultsfordailyreturnsunderhomoscedasticity

andh e t e r o s c e d a s t i c i t y 40Table4 8 Var ia nce ra ti ot est res ul ts for th in tradingadj us ted daily returnsu

nde r h o m o s c e d a s t i c i t y andheteroscedasticity 41Table4.9 Variance ratiotestresultsfor weeklyreturns under

homoscedasticityandh e t e r o s c e d a s t i c i t y 42Table4.10.Varianceratiotestresultsforthintradingadjustedweeklyreturns

underh o m o s c e d a s t i c i t y andheteroscedasticity 43Table4.11.ResultsofOSLandGARCH(1,1)modelsfordailyreturns 46Table4 1 2 R e s u l t s o f OSLa n d G A R C H ( 1 , 1 ) modelsf o r t h i n t r a d i n g a d j

u s t e d d a i l y returns 47

1 INTRODUCTION

Efficient Market Hypothesis(EMH)has beenapopulartopic forempiricalresearchsincetheintroductionofmarketefficiencytheorybyFama(1965).Therearemanys t u d i e s e x a m i n i n g w h e t h e r t h e s t o c k m a r k e t s i n b o t h d e v e l

o p e d ande m e r g i n g countriesbehaveinlinewiththeEfficientMarketHypothesis.Mostofthemf o cu se d onweakformefficiency,thelowestlevelofEfficientMarketHypothesisa n d theresultsaremixed.Ontheonehand,somestudiesrejectthehypothesisthatt h e stockmarketsareintheweakformefficiency(Hoqueetal.,2007,Abeysekera,2 0 0 1 b , Limaetal.,2004).Ontheotherhand,somepapersprovidetheevidencethat

Sincetheestablishmenton28July2000withthefirstsecuritytradingcenterinHoC h i

M i n h City( h e r e i n a f t e r c a l l e d H o s e ) andonlytwol i s t e d c o m p a n i e s t h a t a r

e R e f r i g e r a t i o n ElectricalEngineering

JointStockCompany(REE)andSaigonCablea n d TelecommunicationMaterialJointStockCompany(SACOM),Vietnamstockmarketh a s c o n t i n u e d t o d e v e

l o p s u c c e s s f u l l y byf a c i n g a l l t h e c h a l l e n g e s a n d d i f f i c u l t i e s

O v e r t e n yearso f o p e r a t i o n , t h e totalnumberl i s t e d companiesh a v e i n c r e a s

e d significantlyto635companieswithatotalmarketcapitalizationofVND

650.150b i l l i o n s ( H o s e V N D 5 2 3 9 3 3 b i l l i o n s , H N X V N D 1 2 1 2 1 7 b

i l l i o n s ) T h e marketcapitalizationtoGDPratiohasbeenincreasedyearbyyear.Itgoesupfrom0 2 4 % in2000to0.37%GDPin2010.Thereare102securitiescompanieslicensedwitha t o t a l re gis te re d c a p i t a l of V N D 3 1, 8 66 billion(USD1 , 5 2 8 m i l l i o

n ) T o t a l t r a d i n g accountsareabout1,031,000(includingthe15,000tradingstockaccountso fforeigninvestors),comparedtothe2,908accountsin2000.Thehighandrapidg r o w t h o f V i e t n a m s t o c k marketi s , o f c o u r s e , verya p p e a l

i n g tod o m e s t i c a n d for eig n investors

AlthoughV i e t n a m s t o c k marketh a s d e v e l o p e d r a p i d l y a n d t a k e n liberalizationp r o c e s s recently,itstillpossessesmany

offeaturesthatarecharacteristicsofemergingmarketsl i k e morei n f o r m a t i o n asymmetry,t h i n t r a d i n g a n d w e a k i n s t i t u t i o n a l infrastructure,whichalltogethercouldcausemarketinefficiency.H o w e v e r , notallofemergingmarketsareentirelyinefficientsuchassomer e s e a r c h e r s w h o f i n d t h e e v i d e n c e t o s u p p o r t t h eweakf o r m e f f i c i e n c y i n developingc o u n t r i e s : Limae t a l

( 2 0 0 4 ) f o u n d t h a t H o n g K o n g a n d A s h a r e s f o r boththeShanghai,Shenzhenstocksexchangesareinweakformefficiency.D i ck i n so n etal

(1994)alsoprovidedtheevidencethatNairobiStockExchangeisbehaveinlinewitht he marketefficiencyandMoustafa(2004)alsosupportedthew e a k formEfficiencyMarketHypothesisofUnitedArabEmiratesstockmarket…

H e n c e , consideringthetheoreticalandpracticalsignificance,thetestableim p licat io n s a n d c o n f l i c t i n g empiricale v i d e n c e o f r a n d o m w a l k h y p o t h e s i

s motivateustohaveafreshlookatthisissueofweakformefficiencyinthecontexto f anemergingmarket,namelyVietnamstockmarket

Thisstudyfocusesontestingtheweakformmarketefficiencyandsomeanomaliese x i s

t i n g inVietnamstockmarket.Toanalyzethisissue,werequireadecompositiono f dailya n

d weeklyreturnofVnindexandsharesinrealestateandseafoodprocessingcompaniesinHoChiMinhstockexchangefromJan2007toDec2010

andexaminewhetherthesuccessivestockpricesorreturnsareindependentlyandi d e n t i c a l l y distributed.Paststockpricehasnopredictivecontenttoforecastfutures t o c k price(Fama,1970).Wewillthenadjustthedataforthin(infrequent)trading

t h a t isanimportantcharacteristicofVietnamstockmarketandthatcouldseriouslyb i a

s theresultsofempiricalstudiesonmarketefficiency

Theresearchprovidesanumberofcomplementarytestingproceduresforrandomw a l k orweakformmarketefficiencywhichhavebeen

widelyusedintheliterature.Wea l s o p e r f o r m v a r i o u s t e s t s t o e x a m i n e markete f f i c i e n c y int h e w e a k f o r m , w h i c h focus ontheinformation conveyedbypastprice.Inparticular, we usethe parametricserialcorrelationtestofindependencewhichmeasurestherelationshipo f thecurrentstockreturnand

test,an o n p a r a m e t r i c t e s t , w h i c h i s c o m p u t e d t o t e s t t h e r a n d o m n e s s o

f s t o c k r e t u r n Furthermore,thevarianceratiotestwhichisproposedbyLoandMackinlay(1988)i s carriedouttocheckwhetheruncorrelatedincrementsexistintheseries,undertheassumptionofhomoscedasticandheteroscedasticrandomwalk.Finally,weusetheo r d i n a r y leaststandard(OSL),Autoregressiveconditionallyheteroscedastic( A

Consequentially,th is does notsup po rt t h e findingsof L o c (2006)t h a t the dayofweekeffectexistinginVietnamstockmarketasnegativeTuesdayeffect.

Thefirstcontributionofourresearchis thatthisisoneofthe studiesinVietnam applyingnew econometrics, newmethodologywhich hasbeenaffected theBrooks’( 2 0 0 8 ) methodology.Thisstudyalsohastakeadvantagesofallmodelswhichhaveb e e n testedinthepreviousliteratures Thesecond contribution ofthisstudyistoprovideevidenceagainstpersistentpatterns inanomalyinVietnamstockmarket.T h e n , t h i s studya l s o e n h a n c e s t h e e s t a b l i s h e d literaturebyp r o v i d i n g t h e m o s t r e c e n t analysisofourstockmarket

Theremainderofthisstudyisstructuredasfollows.Sectiontworeportstherelevanttheoreticalbackgroundtotheresearchandreviewsthepreviousempiricalevidenceso n weakformefficiencyindevelopedandemergingcountries.Sectionthreedescribesthedataandmethodology Sectionfourpresentstheempiricalresearch Finally,s e c t i o n f i v e s

u m m a r i z e s t h e r e s u l t s o f t h e study,d r a w s c o n c l u s i o n s a n d p r o v i d e s suggestionsforfurtherresearch

2 LITERATUREREVIEW

2.1 ThetheoryofEfficiencyMarketHypothesis

TheEfficientMarketHypothesisisaconceptofinformationalefficiency,andreferst o market’sabilitytoprocessinformationintoprices.TheideasofEfficientMarketH y p o t h e s i

s appearasearlyasthebeginningoftwentiethcenturyinthetheoreticalc o n t r i b u t

i o n o f B a c h e l i e r ( 1 9 0 0 ) w h o l a i d t h e f o u n d a t i o n f o r r a n d o m w a l k hypothesisofmarketefficiency.However,it

wasuntilthe1960s,Samuelson(1965)h a s b e e n d e v e l o p e d t h e t h e o r e t i c a l f

r a m e w o r k f o r ther a n d o m w a l k a n d F a m a (1 96 5)f i n d s s u p p o r t i v e

e v i d e n c e o f t h e r a n d o m w a l k h y p o t h e s i s t h a t s u c c e s s i v e price changesareindependent.TheEfficientMarketHypothesishasbeenemergedf ro m t h e c o m

b i n a t i o n o f empiricalf i n d i n g s o f Fama( 1 9 6 5 ) a n d t h e o r y o f Samuelson(1965)

Fama(1970)summarizes thisidea inhis classicsurvey bywriting:"Amarketinw h i c h pricesalways 'fully reflect'available information iscalled'efficient'."Accordingt o t h i s h y p o t h e s i s , ina n i n f o r m a t i v e l y efficient market,p r

i c e c h a n g e s mustb e u n f o r e c a s t a b l e Sincen e w s i s a n n o u n c e d randomly,p r i

c e mustf l u c t u a t e randomly.Consequently,itstatesthatitisnotpossibletoexploitanyinformations e t t o p r e d i c t f u t u r e p r i c e c h a n g e I n h i s e a r l y paper,N

o b l e p r i z e w i n n e r F a m a ( 1 9 7 0 ) s u g g e s t s t h a t t h e t e s t s o f e f f i c i e n t m a r k

e t s c o u l d b e s u b d i v i d e d i n t o t h r e e cat egor i es: weakformtest,semistrongformtestandstrongformtestefficiencyande a c h categorydealingwithadifferenttypeofinformation

Thew e a k f o r m t e s t i s t h e l o w e s t l e v e l o f efficiency.A c a p i t a l m a r k e t i s s a i d

t o satisfy weakformefficiencyifthecurrentstockpricesfullyincorporatethei n f o

r m a t i o n inpaststockprices.Hence,tradercannotmakeabnormalreturnsbasedo n thepredicationofpast stockprices.Thesemistrongform efficiencyindicates

thatthe cur re nt st oc kp ri cesi nc lu di nga ll informationkn ow n t o a ll marketp a r t

i c i p a n t s Hence,thisreflectsallpublicavailableinformationsuchasthei n f o r

m a t i o n onstocksplits,annualreports;newsecurityissues…

Tradercannotgett h e abnormalr e t u r n s bya n a l y z i n g t h e a n n u a l reportso r a

v a i l a b l e p u b l i c i n f o r m a t i o n Finally,strong formtestofthe e f f i c ie n tmarkettheorytestsw het he r privateorconfidentialinformationisfullyreflectedinsecurityprices.Thecurrentp r i c e s ofstockincludingallinformationknowntoanymarketparticipantincludingthe publicandprivateinformation, thisassumptionhardlyexistsinreality,sothes t r o n g formofmarketefficiencyisnotverylikelytohold.Hence,notraderwouldb e abletogetabnormalreturnabovetheaverageinvestorevenifhewasgivennewi n fo r m a t io n

Fama(1970)alsointroducesthreemodelsfortestingstockmarketefficiencyi n c l u d i

n g : theExpectedReturnorfairgamemodel,thesubmartingalemodel,andt h e RandomWalkmodel Inthisstudy,weonlyconcentrateontherandomwalkmodelwhichismorepowerfulinsupportoftheEMHthantestsofthefairgamemodela

n d s u b m a r t i n g a l e m o d e l T h e E f f i c i e n t M a r k e t H y p o t h e s i s i s a s s

o c i a t e d w i t h theideaofa“randomwalk”.Thelogicoftherandomwalkideaisthatiftheflow ofinformationisunimpededandinformation isimmediatelyreflectedinstockp r i c e s , thentomorrow’spricechangeswillreflectonlytomorrow’snewsandwillb

ei n d e p e n d e n t o f t h e p r i c e c h a n g e s t o d a y B u t n e w s i s byd e f i n i t i o n u n p r

e d i c t a b l e an d ,thus,resultingpricechangesmustbeunpredictableandrandom.Hence,pricesf u l l y reflectallknowninformation,andevenuninformedinvestorsbuyingad i v e r s i f i e d portfolioatthetableauof

pricesgivenbythemarketwillobtainarateofreturn asgenerousasthatachievedbytheexperts.However,inanefficientmarket,p r i c e c h a n g e s mustbea r e s p o n s e onlyt o

n e w i n f o r m a t i o n S i n c e i n f o r m a t i o n a r ri v e s randomly,sharepricesmustalsofluctuateunpredictably.TheRandomWalkmodelcanbestatedinthefollowingequation:

i s i n d e v e l o p e d c ap i t a l markets.Recentstudies, h o w e v e r , documentthatstockmarketreturns a r e p r e d i c t a b l e T h i s s e c t i o n p r o v i d e s a r e v i e w

o f t h e l i t e r a t u r e o n t h e w e a k f o r m efficiency inbothdevelopedanddevelopingcountries

Methodologically,t e s t i n g t h e w e a k f o r m ef fi cie nc y usedt h e r a n d o m wa lk modelw h i c h iswidelyemployedintheprecedingliterature.Practically,severalstatistica

lt e c h n i q u e s , r u n s test,unitroottest,serialcorrelationtest,andvarianceratiotest,a r e commonlyusedfortestingweakformefficiency.Specially,theruntestisusedi n theliteratureofFama(1965),SharmaKennedy(1977),Cooper(1982),Chiateta l ( 1 9 8 3 ) , W o n g e t a l

( 1 9 8 4 ) , Y a l a w a r ( 1 9 8 8 ) , K o a n d L e e ( 1 9 9 1 ) , B u t l e r a n d Malai k ah (1992),Abraham(2002),WorthingtonandHiggs(2004),Squalli(2006);Daraghmaetal.(2009).Also,theserialcorrelationtestofreturnshasalsobeenusedex ten siv ely byKendell

(1953),andFama(1965), FamaandFrench(1988),W o r t h i n g t o n etal.(2004),Squalli(2006).AndtheunitroottestusedbyDavidand

(1994)applyvarianceratiotesttoexaminetheefficiencyhypothesisofK o r e a n Stockexchangefortheperiodfrom1984to1988.Undertheassumptionofh o m o s c ed a s t i c i t y, theauthorsrejecttherandomwalkhypothesis.However,undertheh e t e r o s

c e d a s t i c i t y , theyc o u l d n o t r e j e c t t h e r a n d o m w a l k f o r d a i l y d a t a I

n addition,theyalsoemploytheweekly,monthly,60dayand90dayintervaldata.

T h e resultsalsocouldnotrejecttherandomwalkhypothesis

Chanetal(1997)examinetheweakformandthecrosscountrymarketefficiencyhypothesisof18internationalstockmarkets,includingAustralia,Belgium,Canada,Denmark,F i n l a n d , F r a n c e , Germany,I n d i a , Italy,J a p a n , N e t h e r l a n d s , N o r

w a y , Pakistan,Spain,Sweden,Switzerland,theUnitedKingdom,andtheUnitedStatesf o r t h e p e r i o d f r o m 1 9 6 2 t o 1 9 9 2 Theyc o n c l u d e thata l l s t o c k marketsi n t h e samplea r e i n d i v i d u a l l y w e a k f o r m e f f i c i e n t a n d onlya s m

a l l n u m b e r o f s t o c k

marketsshowevidenceofco-integrationwithothersbyusingPhillips-Peron(PP)u n i t integrationtests

rootandJohansen’sco-C.Cheungetal

(2001)employvarianceratiotestswithbothhomoscedasticityandh e t e r o s c e d

a s t i c i t y t o e x a m i n e r a n d o m w a l k hypothesisf o r H a n g SengI n d e x o n H o

n g KongStockExchangeforperiodfrom1985to1997.TheyconductthatHangSengfollowsarandomwalkmodelandconsequentlythattheindexisweakforme f f i c i e n t

Worthingtonetal(2004)investigaterandomwalkin16developedmarketsandfouremergingstockmarketsfortheperiodfrom1987to2003.Byusingvariousmethodsincludingserialcorrelation,runs,threetypesofunitroottestandmultiplev a r i a n c e ratiotests,thepaper’sresultindicatesthattherandomwalkhypothesisisn o t rejectedinmajorEuropeandevelopedmarkets.Particular,Germany andNetherl and s a r e w e a k

f o r m e f f i c i e n t u n d e r b o t h s e r i a l c o r r e l a t i o n a n d r u n s t e s t s , whileIreland,PortugalandtheUnitedKingdomareefficientunderonetestortheo th er T h u s, r e s t s o f t h e marketsd o n o t f o l l o w a r a n d o m w a l k T h e A D F a n d P h i l

li p

s-P er r o n unitroottestsrejectthenullhypothesisofrandomwalkintheall20emerginganddevelopedmarkets,whiletheKPSSunitroottestsfailtorejectthen u l l hypothesis

varianceratiot e s t , t h e n u l l h y p o t h e s i s o f h o m o s c e d a s t i c i t y a n d h e t e r o

s k e d a s t i c i t y a r e n o t r e j e c t e d intheUnitedKingdom,Germany,Ireland,Hungary,

PortugalandSweden.T h e r e j e c t i o n o f t h e n u l l hypothesiso f t h e h o m o s c e

d a s t i c i t y b u t n o t t h e

heteroscedasticityisf o u n d f o r France,F i n l a n d , N e t h e r l a n d s , N o r w a y a n d Spain.Amongtheemergingmarkets,onlyHungarysatisfiesthestrictestrequirementsfora randomwalkindailyreturns

Inamorerecentresearch,Kimaetal(2008)examineefficiencyofstockpricesofg r o

u p A s i a n m a r k e t s T h e weekly,dailyd a t a f r o m 1990a r e c o n s i d e r e d i n t

h i s study.Byusingnewmultiplevarianceratiotests,itisfoundthattheHongKong,J a p a n e s e , KoreanandTaiwanesemarketsareefficientintheweakform.TheothermarketsofIndonesia,MalaysiaandPhilippinesareshownnosignofmarketefficiency.SingaporeandThaimarketsbecomeefficientaftertheAsiancrisis

2.2.2.Evidencefromdevelopingmarkets

Incontrastwiththeevidencefrom developedmarkets,thefindingsofweak for

me f f i c i en c y ondeveloping marketsa r e mixed.M os t ofd e v e l o p i n g countriessufferw i t h theproblemofthintrading.Inaddition,insmaller

markets,itiseasierforlarget r a d e r s tomanipulatethemarket.Thoughitisgenerallybelievethatthedevelopingc o u n t r i e s arelessefficient.However,theempiricalevidencedoesnotalwayssupportthisthought.Manypapersreportweakformefficiencyindevelopingc o u n t r i e s L i m a e t a l

(2004)e m p l o y d a t a ofthed a i l y s t o c k p r i c e i n d e x e s o f Shanghai,Shenzhen(China),HongKong,andSingaporeStockexchangeoverthep e r i o d from1992to2000.TheyfindthattheHongKongandAsharesforboththeShanghai,Shenzhenstocksexchangesareinweakformefficiency

Dickinsone t a l

( 1 9 9 4 ) a l s o e x a m i n e N a i r o b i S t o c k E x c h a n g e u s i n g t h e autocorrelationa n d r u n s t e s t s T h e i r d a t a i n c l u d e w e e k l y p r i c e s o f t h e 3 0mostactively tradedstocksfrom1979to1989.TheresultsalsosupporttheweakformofE f

f i c i e n t MarketHypothesisinNairobiStockExchange

Mojustafa( 2 0 0 4 ) e x a m i n e s t h e b e h a v i o r o f s t o c k p r i c e s i n U n i t e d A r a b

E m i r a t e marketbyusingt h e n o n p a r a m e t r i c r u n s t o t e s t r a n d o m n e s s T h e d

a t a c o n s i s t s o f dailypricesof43stocksfortheperiodfrom2001to2003.Theresultsrevealthat40s t o c k s o u t o f t h e 4 3 a r e random.H e n c e , t h i s supportst h e w e a k formE f f

Abeysekera(2001)indicatesthattheColomboStockExchange(CSE)inSriLankai s weakforminefficientbyusingtheserialcorrelation,runsandunitroottestsfort h e p e r

i o d from1 9 9 1 t o 1 9 9 6 T h e f i n d i n g s o f t h r e e t e s t s c o n s i s t e n t l y r e j e c t t h

e r an d o m walkhypothesis.Theauthoralsoexaminesadayoftheweekandmonthoft h e yeareffectontheCSE,butneithereffectfoundtobeonthestockmarketinSriL a n k a

Smithe t a l

( 2 0 0 3 ) e x a m i n e t h e r a n d o m w a l k h y p o t h e s i s f o r f i v e mediums i

z e E u r o p e a n emergingstockmarketsbyusingthemultiplevarianceratiotestsfort

hep e r i o d f r o m 1 9 9 1 t o 1 9 9 8 T h e f i n d i n g s o f G r e e c e , Hungary,P o l

a n d , P o r t u g a l

ea u t o c o r r e l a t e d I n T u r k e y , h o w e v e r , t h e I s t a n b u l stockmarketf o l l o w s a r

a n d o m w a l k

Abrosimovaetal(2002)testweakformefficiencyinRussianstockmarketrangingf r o m1995to2001byemployingunitroot,autocorrelationandvarianceratiotests.T h e resultsofbothautocorrelationandvarianceratiotestsrejectthehypothesisoft h e randomwalkfordailyandweekly,butnotformonthlydata.Formonthlydata,t h e varianceratiounderassumptionofheteroscedasticity

incrementsthehypothesiso f randomwalkcannotberejected

Hoqueetal

(2007)examinetherandomwalkhypothesisforeightemergingequitymarketsinAsiaincludingHongKong,Indonesia,Korea,Malaysia,thePhilippines,Singapore,TaiwanandThailandfrom1990to2004.Theresultofvarianceratiotesti n d i c a t e s t ha tt h e s t oc k p r i c e

so f e i g h t As i a n countriesd o n o t f o l l o w t h e r a n d o m w a l k withtheexceptionsofTaiwanandKorea

ThefindingsfrommorerecentresearchbyAbdmoulah(2010)documentsthatthe

GarchM(1,1)modeli m p l e m en t e d f o r 1 1 A r a b s t o c k m a r k e t s i n c l u d i n g d

a i l y p r i c e s o f t h e n a t i o n a l i n d ex e s ofSaudiArabia,Kuwait,Tunisia,Dubai,Egypt,Qatar,Jordan,AbuDhabi,B a h r a i n , MoroccoandOmanforperiodsendinginMarch2009

Overall,t h e e m p i r i c a l r e s u l t s f r o m bothd e v e l o pe d a n d d e v e l o p i n g markets

s h o w co n t r as t in g evidenceonweakformefficiency.Especially,resultsofwhetherornotemergingmarketsfollowarandomwalkareratherconflicting.Mixedresultsfro

ml i t e r a t u r e onemergingstockmarketsefficiencyarenotsurprisingsinceitiso b

s e r v e d t h a t e m e r g i n g s t o c k marketsa r e g e n e r a l l y less e f f i c i e n t t h a n d e v e l

o p e d markets.In ad di ti on, w i t h th e c h a r ac t e r i s t i c a s highle vel of l i q u i d i t y andtr ad in g activity,substantialmarketdepthandlowinformationasymmetry,developedmarketsareseemtobeintheweakformefficiencymarketwhilemostofd

e v e l o p i n g marketsarecharacterizedas moreinformation asymmetry,lowervolumeandfrequencyof

trading(thintrading)andweakinstitutionalinfrastructure,settlementdelays,weakerdisclosureandaccountingrequirement,whichalltogetherc o u l d causemarketinefficiency(Islametal.,2005).However,

notallofdevelopingmarketsarenecessarilyentirelyinefficientsuchasHongKong(Limaetal.,2004),N a i r o b i StockE x c h a n g e ( D i c k i n s o n e t a l , 1 9 9 4 ) , UnitedA r a b Emirate( U A E ) ( M o u s t a f a , 2004),Iranstockmarket(Oskooeetal.,2010)

3 DATAA N D M E T H O D O L O G Y

3.1 DataDescription

Theemployeddata inthis study consistso f timeseries(daily andweekly frequency)ofVietnamstockmarketindexandstockpriceinrealestateandseafoodp r o c e s s i n g companiesfortheperiodfrom2007to2010.Alldataisobtainedfromel ectron i c databasefromthewebsitecophieu68.com.Atotalof996dailyand202weekly obs

Vnindexiss e l e c t e d a s a r e p r e s e n t a t i v e f o r V i e t n a m s t o c k marketi n d e x tob e

parametricmethodstotesttherandomw a l k hypothesis.Inparticular, weusetheparametric serialcorrelation testwhichmeasurestherelationship ofthe currentstockreturnanditsvalueintheprevious p e ri o d Wewillthenusetheruntest,anonparametrictest,whichiscomputedtot e s t therandomnessofstockreturn.Furthermore,varianceratiotestwhichisproposedbyLoandMackinlay(1988)willbecarriedouttocheckwhetherun co rrel at ed incrementsexistintheseries,undertheassumptionofhomoscedastic

andheteroscedasticrandomwalks.Finally,theOSL,ARCH,GARCH(1,1)modelshavebeenemployedintheliteraturetoexplorethecalendaranomaliesexistinginHoChiMinhStockexchange.

Table3 1 p r e s e n t s a summaryo f d e s c r i p t i v e statisticso f

t h e d a i l y r e t u r n s f o r V n i n d e x andeightindividualstocksreturns.Samplemeans,maximums,minimums,s t a n d a r d deviations,skewness,kurtosisandJacque-Berastatisticsandp-

valuesarereported.Itcanbeseenthatexcept TS4(0 0005), SJS(0 0006), CII(0.0003), allindexes havethenegativemeanofreturn.ThelowestminimumreturnisinFMC( - 0 0 5 8 5 6 ) whilethehighestmaximum

returnisTS4(0.04905).Thestandarddeviation s ofreturnsrangefrom0.01939(Vnindex)to0.03434(TS4)

Byandlarge,thestatisticsshowsthatthereturnsofVnindexandallstocksarenotnormaldistributed.Giventhattheparametersskewnessandkurtosisrepresent thes

t a n d a r d i s e d fourthandthirdmomentsofadistribution.Theseparametersareused

w i t h

Jarque-Berastatisticstoindicatewhetheradatasetisnormallydistributedornot.Skewnessmeasurestheextenttowhichadistributionisnotsymmetricaboutitsmeanv a l u e T h e s k

e w n e s s o f t h e n o r m a l d i s t r i b u t i o n i s z e r o P o s i t i v e s k e w n e s s meansthatthedistributionhasalongrighttailandnegativeskewnessimpliesthatt hedistributionhasalonglefttail(Oskooeetal.,2010).Table3.1showsthatther etu rns ofallstocksexceptVnindex,TS4arepositiveskewedalthoughthesk ew n e s s statisticsarenotlarge.Thepositiveskewnessimpliesthatthereturnof d i s t r i b u t i

o n s oft h e sharestradedontheexchanges have alongrighttailof l a r g e valuesandhenceahigherprobabilityofearningpositivereturns

Moreover,K u r t o s i s m e a s u r e s t h e p e a k n e s s o r f l a t n e s s o f t h e distributiono f t h e s e r i e s Thekurtosisofthenormaldistributionisthree.Ifthekurtosisexceedsthree,thedistribution ispeakedwhichisindicatingasleptokurtic;ifthe kurtosisislessthanthree,thedistributionisflat,thisisindicatingasplatykurtic.Thekurtosisvalueo

fa l l s t o c k s a n d V n i n d e x a re s m a l l e r t h a n t h r e e, d i f f e r e n t f r o m thato f a normald i s t r i b u t i o n , therebyindicatingtheplatykurticfrequencydistributionofallstocksr e t u r n series

e a u t o c o r r e l a t i o n measures therelationshipbetween thecurrentstockreturnanditsvalu e intheprevious

period.Hence,thistestisemployedinmanyempiricalstudies( M o b ar e k etal.,2000,Abraham,2002,Dickinsonetal.,1994,Groenewold,1997,Limaetal.,2004,Islametal.,2005,Locetal.,2010).Itiscalculatedas:

Whereρki st h e s e r i a l c o r r e l a t i o n c o e f f i c i e n t o f s t o c k returnso f lagk ; N i s

n

overp e r i o d t + k ;r i st h e samplem e a n o f s t o c k r e t u r n s ; a n d k i s t h e l a g o f t h e period

Thetestaimstoexaminewhethertheautocorrelationcoefficientsaresignificantlyd i f f e r e n t fromzero.Iftheautocorrelationiszero,thenthesampleofautocorrel at io ns areapproximatelynormallydistributedwithmean0andvariance1 /

basedonthepremiset h a t i f a s e r i e s o f a d a t a i s r a n d o m , t h e observednumbero f r u

n s i n t h e s e r i e s s h o u l d b e c l o s e t o t h e e x p e c t e d n u m b e r o f runs.A r u n i

s a s e q u e n c e o f su c ce s s iv e pricechangewiththesamesign.Therefore,thepricecanbeclassifiedintothreekindsofruns:anupwardrun(pricesgoup),adownwardrun(pricesgodown)andaflatrun(pricesdonotchange)

Ther u n t e s t c a n a l s o b e d e s i g n e d t o c o u n t t h e directiono f changef r o m s

t o c k returns; forinstance,apositivechangecouldbeoneinwhichthereturnisgreaterthanthesampleofmean,anegativechangeoneinwhichthereturnislessthanthemean,andzerochangerepresentingachangeequaltomean.Underthenullhypothesisofindependenceinsharepricechanges(sharereturns),theactualruns

(R) arethencountedandcomparedtothetotalexpectednumberofruns(m)undertheassumptionofindependenceestimatedas:



m

ZR   0.5   m

WhereRistheactualnumberofruns,mistheexpectednumberofrunsand0.5ist h e continuityadjustmentinwhichthesignofthecontinuityadjustmentisnegative( -

ofdependenceamongs h ar e r e t u r n s w h e n R i s t o o smallo r t o o l a r g e , t h e t e

s t i s a t w o

-t a i l e d o n e A n e g a -t i v e Zvalueindica-tesaposi-tiveserialcorrela-tion,whereasapositiveZvalueindicat es a n e g a t i v e s e r i a l c o r r e l a t i o n T h e p o s i t i v e s e

r i a l c o r r e l a t i o n i m p l i e s t h a t t h e r e i s a p o s i t i v e d e p e n d e n c e o f s t o c k p r i c e

s , t h e r e f o r e i n d i c a t i n g a v i o l a t i o n o f r an d o m walks.SincethedistributionZisN(0,1),thecriticalvalueofZatthefivep e r c e n t significancelevelis±1.96Brooks(2008)

3.2.3 Varianceratiotest

Thev a r i a n c e r a t i o t e s t w h i c h i s d e v e l o p e d byL o e t a l ( 1 9 8 8 ) i s n o t only

m o r e po w e r f u l butalsoreliabletestofrandomhypothesis.Itisdesignedtotestthenullhypothesisofrandomwalkprocessforstockpriceunderthehomoscedasticityandh e t e r o s c e d a s t i c i t y (Loe t a l , 1 9 8 8 ) H e n c e i t w i d e l y usesbyboth

academicsa n d p r a c t i t i o n e r s totestthemarketefficiencyupontheacceptanceofthenullhypothesis

(Ayadietal.,1994,C.Cheungetal.,2001,Kimaet al.,2008, Limaetal.,2004,Loce t al.,2010,Smithetal.,2003,Y.Liuetal.,1991).

Thevarianceratiotestexploits

thefactthatifthelogarithmofpriceseriesfollowsar an d o m walk,thenthereturnvarianceshouldbeproportionaltothereturnhorizon.Thatisthe tes tisbased on theassumptionth at thevariance of i n c r e m e n ts int he randomwalkseriesislinearinthesampleinterval Particularly, ifareturn seriesfollowsarandomwalkprocess,thevarianceofitsqdifferenceswouldbeqtimesthevarianceofitsfirstdifferences( H

e , June1991)

Var(pt pt q)qVar(pt pt 1) (3.7)Whereq i s anyp o s i t i v e i n t e g e r T h e v a r i a n c e r a t i o V R ( q ) i s t h e n determinedasf o l l o w s :

1Var(ptpt q)VR(q)q



2(q)2

(3.8)Var(ptpt 1) (1)

Fore x a m p l e , t h e v a r i a n c e o f quarterlyi n c r e m e n t s mustb e t h r e e t i m e s

a s l a r g e a s thatofmonthlydifferences Therefore, if(nq+1)observations of(P0,P1,

h



q)2

(3.9)Where

hq(nq1q)(1q)

And

Z(q)VR(q)1

N(0,1)

*(q)2

Sincefinancetimeseriesoftenpossesstimevaryingvolatilitiesanddeviatefromnormality.Hence,besidesthehomoscedasticity, thisstudy alsousestheLo eta l ’

s ( 1 9 8 8 ) h e t e r o s c e d a s i t i c i t y r o b u s t s t a n d a r d n o r m a l t e s t s t a t i s t i c s T

h e h e t e r o s c e d a s t i c i t y consistentstandardnormalteststatistic,Z*(q)isthendefineda s

Z*(q)VR(q)1

N (0,1)

*(q)2

q12(qj)

(3.15)

j1 q 

ThisstudyhasbeenconductedtotestthemarketefficiencyinHosebyexaminingd a

y ofweekeffectpresentinVnindexandeightselectedstocksofrealestateandseafoodp r o c e s s i n g c o m p a n i e s T o carryo u t t h i s e s t i m a t i o n , w e u s

e r e g r e s s i o n model,A R C H a n d G A R C H ( 1 , 1 ) w h i c h h a v e b e e n e m p l o y e

d i n m a n y empirical r e s e a r c h (Abeysekera,2001a,Hau,2010,Loc,2006,Gaoetal.,2005,Solniketal.,1990)

However,thehomoscedasticity assumptiono fO LS islikelytobe v i o l a te d inthec o n t e x t o f f i n a n c i a l times e r i e s , t h a t i s , s t o c k r e t u r n s I f t h e a s s

u m p t i o n i s n o t sat isf ied, the sta nda rd e r r o r s could be w r o n g , and, therefore, conclusions inferred f r o m themodelcouldbemisleading(Brooks,2008).Therefore,wewillthenusetheA u t o r e g r e s s i v e Conditionally HeteroscedasticmodeltotesttheARCHeffectw h e t h e r presentintheresidualsofanestimatemodel

Wew i l l t h e n u s e t h e G e n e r a l i s e d A u t o r e g r e s s i v e C o n d i t i o n a l H e t e

r o s c e d a s t i c i t y ( G A R C H ) modeltotest

theestimation.TheGARCHmodelsprovideamoref l e x i b l e frameworkforcapturingthetimevaryingvolatilityinthereturnseries.In

thispresentstudy,The G ARC H (1, 1)modelhas beenemployedfortesting theseef f ect s.

Ifthereisnodayofweekeffectinmeanreturns,thecoefficientsarenotsign ifi ca

nt ly d i f f e r e n t f r o m z e r o T h e dayo f w e e k e f f e c t i s alsoexaminedbycheckingsignificance of th e coefficients cand

k

calendareffectwillbeacceptedwhencoefficientofatleastonedummyvariableisstatistically significant( B r o o k s , 2004) The presenceofc a l e n d a r effectinretur

ns w i l l indicatethatstockreturnsinVietnamarenotcompletelyrandom

3.2.5 Thintradingadjustment

Thee f f i c i e n c y ofa p a r t i c u l a r marketi s d e p e n d e n t u p o n c e r t a i n c o n d i t i o n s, particularly,thevolumeoftrading.Marketthinness(lowvolumeoftrading)makesi t difficultfortraderstoreacttonewinformation(andthereforepricestoreflectit).T his c a n

b e e x p l a i n e d t h a t t h e a b s e n c e o f a p r i c e changeo r v o l u m e o f t r a d i n gbet ween twomomentsmaybeinterpretedasbeingcausedbytheabsenceofapricer e a c ti

o n t o n e w i n f o r m a t i o n a n d c o n s e q u e n t l y as a s s i g n t h a t t h e marketi s i n e f f i

c i e n t I n a d d i t i o n , t h i n t r a d i n g a n d i l l i q u i d i t y a r e f e a t u r e s f o u n d

m o s t l y i n emergingmarketsandpreventtradesfrombeingcarriedoutatpriceshowninthed a t a Antoniouetal

(1997)reportthatobserveddependenceisnotnecessarily,butr a t h e r m a y b e s t a t i

s t i c a l i l l u s i o n b r o u g h t a b o u t byt h i n t r a d i n g T h e r e f o r e , t e s t s

ta t i st i c s w h i c h i g n o r e t r a d i n g b e h a v i o u r mayb e u n r e l i a b l e Manys t