Testing the weak form efficiency of viet

Testing the weak form efficiency of viet Testing the weak form efficiency of viet Testing the weak form efficiency of viet Testing the weak form efficiency of viet Testing the weak form efficiency of viet Testing the weak form efficiency of viet Testing the weak form efficiency of viet Testing the weak form efficiency of viet

University of Warsaw

Faculty of Economic Sciences Quang Hung Nguyen

Testing the weak-form efficiency of Vietnamese

stock market, case of Ho Chi Minh Stock Exchange 2006-2010

Quantitative Finance

The thesis written under the supervision of

Dr Michał Brzozowski Chair of Macroeconomics and International Trade Theory

Faculty of Economic Sciences, University of Warsaw

Warsaw, 02/2013

Abstract

The purpose of the following dissertation is to analyze and determine the viability and ultimately the competitiveness of the emerging Vietnamese Stock Market in comparison to the more well-known and successful stock markets throughout the world The first step in this analysis and the focus of this essay is to determine whether this Vietnamese Stock Market is weak form efficient

at this stage of the game This determination depends on analyzing two different approaches The first the test used is of randomness; second, the test of predictability To fully determine the results of each, the analysis will primarily focus on an examination of the validity and applicability of both implemented approaches There are essentially three tests involved to examine randomness: 1) The portmanteau test of auto-correlations; 2) the unit root tests, and 3) the Lo and MacKinlay's variance ratio test In an attempt to measure random walk hypothesis of this market, these tests were summarily applied They revealed that there are, indeed, substantial deviations from random walk hypothesis of the returns in the stock market in Vietnam Additionally, predictability was the next goal Tests of technical trading rules were used in order

to measure predictability of the Vietnamese Market These tests showed that the prices of stock changes in the Vietnamese market can be predictable This predictability means that trading cost nets can be profitably exploited In light of these results, the logical conclusion that can be gleaned is that the Vietnamese stock market is not weak-form efficient

Keywords

Efficient market Hypothesis, Vietnam stock market, Random walk, emerging stock market, market efficiency

CHAPTER III THEORETICAL FRAMEWORK AND EMPIRICAL RESULTS 16

3.1.1 The development of Efficient Market Hypothesis 17

3.2 Empirical evidence on Efficient Market Hypothesis 19

CHAPTER IV DATA AND RESEARCH METHODOLOGY 25

4.3.1Tests of Randomness 27

CHAPTER V EMPIRICAL RESULT AND ANALYSIS 34

Acknowledgment

I want to express my gratitude to Dr Michał Brzozowski, my supervisor for his precious

guidance during preparation of this thesis

I want to thank to my parents and Duong Hoang, my best friend for their love and support Fulfilling this goal would not have been possible without them

Abbreviation

VND Vietnam Dong (National Currency Unit)

CHAPTER I INTRODUCTION

1.1 Introduction

Over the past 30 years, the efficient market hypothesis (EMH) has been widely mentioned in the financial literature by many financial economists because it has an important implication in a reality Fama (1970) suggested an ideal about the market in which the price of securities at any time ―fully reflects‖ all the available information which happens at that time If it occurs, we can conclude that is the efficient market According to the Fama‘s work, the efficient market hypothesis has been researched in not only developed markets but also in emerging markets in order to classify them into three levels which are depended on the available of information named weak form, semi-strong form and strong form After doing the initial research about the

efficient market hypothesis, I chose the topic for my dissertation is: testing the weak-form

efficiency of Vietnamese stock market, case of Ho Chi Minh Stock Exchange 2006-2010 Two

periods are pre-crisis and crisis was included in this research

1.2 Background and objective

The study into market efficiency has elicited increased interest amongst financial researchers A market is defined as efficient if all the available information is reflected in the prices There are three type of market efficiency: strong market efficiency, semi-strong market efficiency and weak market efficiency Financial analysts seem to have concentrated in the study of weak form market efficiency There are numerous factors that affect market prices, an understanding of which would enable market participants to seize opportunities for investments and arbitrages This is because most markets in the world do not exhibit the strong and semi strong forms of efficiency but display different degree of the weak form of market efficiency (Fama 1970) The Vietnamese Stock Market has only been in existence for a little over a decade, and yet it is ranked 24th in the world according to the VN index This is remarkable growth for such an adolescent market During the past decade, this stock market has grown significantly, beginning has only two companies and now with 258 companies listed on the Ho Chi Minh Stock Exchange and 328 companies listed on the Hanoi Stock Exchange (USA Today, 2010) More researchers need to take not of these aforementioned monumental successes in the Vietnam Stock Market Potential investors would more than likely invest in this gold mine if only they had all of the information Because of this tremendous growth, the following is an analysis of

this market, specifically, the Ho Chi Minh Stock Exchange This research seeks to see if the evidence point to Vietnam Stock Market is, through 2006-2010 is a week-form efficiency

1.3 Research methodology

The problem background of this dissertation is whether the Vietnamese market exhibits weak form of market efficiency This dissertation aims at establishing a better understanding of the Vietnamese stock market

Testing random walk hypothesis as a first proposition of weak-form efficiency, secondly the Variable Length Moving Average rules (VMA) and Variable Length Moving Average rules (FMA) will be used to test whether future movement of stock prices can be forecasted and profitability exploited Data obtained from States Securities Committee of Vietnam

1.4 Outline

The thesis consists in 6 chapters, Chapter 1 deals with an introduction to the paper which states the objective and methodology of study It also provide brief outline of thesis Chapter 2 is devoted an overview of the Vietnamese stock market This covers the development of the market, the characteristics of the market and the ownership structure of the market Chapter 3 presented the Theoretical Framework and Literature reviews of empirical evidence in EMH field include all three forms, but focus on weak-form efficiency In Chapter 4 provides a data and research methodology An overview of the methodology will be provided as well as the statistical explanation of the data Report and analyze results from empirical tests will be presented in Chapter 5 Conclusion from findings of study in Chapter 6

Chapter II OVERVIEW OF VIETNAM STOCK MARKET

2.1 Overview

Vietnam is classified as a developing country with a population of an estimated 86 million people The country‘s economy was been transformed into a capital market in the late eighties from a planned economy The Vietnam stock market was established in 2000 in Ho Chi Minh City with an intention to speed the capitalization of the country The establishment of the market had been a major step made by the government towards the development of a public security market In 1993, the government set a special committee that was tasked with the responsibility

of conducting research and the preparation of strategic plan towards the creation of the stock market The State Securities Commission (SSC) is a government body charged with the responsibility of establishing laws, organization and supervising the stock market as at the first day of trading the company had only two listed companies 247 companies being listed in 2010 with an overall capitalization of $ 28.28 billion(VND537.4 trillion) The market limits the foreign ownership of listed companies to 49% This capitalization represents a very small percentage of the total GDP of the country making it one of the smallest economies in southern Asia which has some of its countries recording their average capitalization that equated to up to 130% of their GDP However, the market has recorded a remarkable growth that can also be exhibited by the continued economic growth of the country

At first the growth was slow, but had a boom in the market value and the number of companies listed, resulting in Vietnam officially becoming the 150th member of the WTO by 2006 By

2007, the market increased to more that 1000 points Moreover, their listed companies had grown to a whopping 400 Trouble came in 2008, however, as it did with nearly all economies throughout the world Farber et al (2006) claimed that there are a number of factors that directly

or indirectly had an impact on the market; namely clusters of limit-hits, the effect of financial policies, and the limit of information transparency This is often referred to as the ―herd effect,‖ and has been a serious challenge to not only the Vietnamese market, but to nearly every market Nonetheless, the Consumer Price Index (CPI) was increasing, and peaked in 2008 at 19.89% (QDND.vn, 2009)

The Vietnamese stock market has had great growth and great challenges over ten years However, Yen and Tran (2009) believe that investors, especially foreign investors, lack enough information about the development of the Vietnam Stock Market, as mentioned above There simply have not been sufficient empirical studies on this market

2.2 Background of Vietnamese stock market

Not alike with development stock market in other countries where unofficial market and OTC market existed for a certain period before stock exchange officially started, there was no such of informal market like OTC in Vietnam before establishment stock exchange in 2000 The established of stock exchange based on government‘s awareness of necessity for development capital market

2.2.1 The shareholding reforms

The development of the Vietnamese stock market was unlike other markets that had the previous unorganized markets or Over the Counter markets It was a government initiative having realized the need for the market for the development of capital markets and the economy long periods of subsidization characterize the war torn country as at 1975 Numerous State Owned Organizations were established during the post war period while the privately owned companies were restricted The launch of the Doi Moi reforms, in 1985, was a government‘s move aimed at reviving the sick economic conditions of the country These reforms were led to encourage private investment and foreign direct investment These would be the heart beat into the revival of the ailing economy The state owned corporations were mostly inefficient in comparison to the privately owned enterprises, hence, could not compete effectively This disparity coupled with the need to have several joint-stock companies led to the development of the stock market New legislations were issued by the government dealing with the equitization

of State owned Enterprises into Joint stock companies The equitization legislations, formed in

1998 stipulate the methods for the selection and valuation of SOEs for equitization

Vietnam government studied model from neighbour is China in management foreign enterprises For example, investments in banking sector are welcomed but government remain 51% controlling stake Besides, essential areas are electricity production, mineral exploration, telecom and water supply Private companies can be 100% foreign ownership but listed companies on the market, it falls to 49%

2.2.2 The Stock exchange

As mentioned previously, this section intent present the development process and market features such as participants, listing and trading profiles, stock ownership structure Ho Chi Minh Securities Trading Centre (HOSTC) was established in July, 2000 Five years later, Hanoi Securities Trading Centre (HASTC) was established on July, 2005, it was projected act as OTC market while HOSTC operated as official stock exchange where listed companies or institution are traded In June, 2004, HoChiMinh index (or VN-INDEX) was 249.7 points, total market

capitalization accounted 3.4% of Gross Domestic Product (GDP) On May, 2007 , Ho Chi Minh

Securities trading Centre was converted to Ho Chi Minh stock exchange (HOSE), officially

established on 8th August, 2007

Figure 1: Market Performance 2000-2011 VN-Index (cophieu68)

According to above figure, Vietnam‘s stock market has changed volatile in 11 years, from

2000-2003, firstly, VN-Index grew up strongly, peaked 571 points on June 25th, 2001 and fell deeply

after that, 225 points on October 11th, 2001, one month later on November 15th , 2001,

VN-Index reach 296 points However, VN-VN-Index continues downtrend and got 131 points on October

26th, 2003 Second period 2004-2005, there is no fluctuate during this time, VN-Index between

215 points to 308 points (Feb 4th, 2004-Dec 28th , 2005) In 2006-2009 period, VN-Index reached

1158 points on March 12th 2007 before financial crisis, however, due the effects of financial

crisis, VN-Index was going down and had lowest point at 235 on Feb 24th 2009 2010 until

September 2011, VN-Index between 400-550 points, in the end of 2011, VN-Index was falling

down and got 350 points on Dec 28th 2011

In 2006, market has grown up impressively with a lot new listed companies, there are 154

companies listed on Hanoi Securities Trading Centre (HASTC) and 164 on HOSE By the end of

2011, the number of listed companies was increasing to 699 companies, which were 306

companies in HOSE and 393 in HASTC (HOSE & HASTC, 2011)

2005 2011

PE: Price/Earnings ratio; FY: Fiscal Year

Source: Data obtained from BIDV Securities www.bsc.com.vn

Table 1: Vietnam at a glance reported by Bloomberg

During the worst period, financial crisis (2008-2009), VN-Index fell to 230 points in March 2009 which was traded at 8x PE, companies keep growing At the end of 2005, VN-Index got 307.5 points and still trade at 6.5 PE, companies have seen health earning growth despite of difficult time In 2011, PE increased to 10.6, however it still low when comparing to others market in Asia (Bloomberg & VCSC, Sales commentary, 2011)

Consumer Goods

Figure 2: Sector of listed companies in 2005(State Securities Commission www.ssc.gov.vn )

Figure 3: Listed companies by sector (Stoxplus, 2011)

In 2005, there are total 32 listed companies and the largest sector is Industrials, next is Consumer Goods Industrials continue is a largest sector in 2011, but decrease to 42%, the pie become split new sectors, especially Financials growing fast in 2011 when contribute 14% of total

2.3 The structure and organization

This segment will discuss the Vietnamese stock market as regards the regulations and functionality of the market

2.3.1 The State securities commission (SSC) was established in 1996 and charged with the

responsibility of organizing, developing and supervising the country‘s stock market From its formation to 2004, the commission had operated as a branch of the prime minister This created structural weakness to the commission that inhibited it efficiency in the fulfillment of its objectives To resolve these weaknesses, the commission was handed over to the ministry of finance This was in a bid that the performance of the stock market would improve The main functions of the commission as stated in the Decree 90/2003/ND-CP are as follows

1 Issuance, implementation and enforcement of guidelines and rules in the securities market

2 Organization and management of stock trading centre‘s in the country

3 Giving licenses to securities companies, advisors, security investment funds, depositories and custodians

4 Train specialized staff for the industry

Derived from its roles, the commission is structures in eight departments namely, the Securities Market Management, Human Resource, Supervision and Enhancement, International Cooperation Legal Affairs, Securities Issuance Management, Planning and Finance and Securities Business Management

2.3.2 Securities Trading Centre (STC)

This is an organization controlled by the SSC and whose operational expenses are covered by the government This is an organization charged with the responsibility of organizing, executing and supervision of all trading activities The responsibilities and rights have been stipulated in the decree 144/2003/ND-CP they include

1.Organization, management and supervision of trading securities

2 Management of the securities trading system

3 Management and supervision of the listing of securities

4 Managing and supervision of information disclosure requirement by the listed companies

5 Management and supervision of the centre‘s members

6 Conducting information disclosures

2.3.3 Securities companies

The securities are required to be developed by the limited liability or the Joint stock companies The main activities conducted by the security companies are brokerage, security investment portfolios, owned trading, providing advisory on financial and securities investments and underwriting Licensed brokers or dealers are allowed to be members of the STC This gives the access to the trading system for the trading of securities The fulfillment of the below listed requirements is required for companies to be given a business license

1 Possession of a business plan that is in synch with the socio-economic development objective of the securities industry

2 Possession of adequate technical facilities to conduct business

3 Meeting the minimum capital requirement specified by law for each business activity Companies that wish to conduct more than one business activity must meet the cumulative capital requirement for each of the business activities

4 The directors and other practitioners should be qualified by the SSC, thus holders of a practitioner certificate

5 The qualification for an underwriting license is for the companies that have licenses for owned dealing

2.3.4 Requirement for listing

The requirements placed by the government are aimed at ensuring the integrity and credibility of the trading centre The qualities of the listed companies are therefore crucial to attain this level of integrity and credibility These requirements are contained in the Decree 144/2003/ND-CP For the listing of a company the following requirements should be met

1 The company should be a joint stock company with a minimum capital requirement of

$0.32 million

2 Having recorded profits for two consecutive years prior to the application for listing

3 The board of management, board of Directors and the board of supervisors must make a commitment to hold a 50% of the company‘s share capital for at least three years

4 The least number of outside investors is 50 who must hold at least 20% of the company‘s equity For joint stock capital with share capital that exceeds VND100billion, a 15% outside ownership can be applied

5 The applicants for listing are required to submit to the SSC audited financial statements, the management structure of the organization, charter of incorporation and the prospectus

Upon meeting the above listed requirement, the SSC is required to issue the firm with the license within 45days The qualification criteria for foreign invested companies are similar to those of the joint stock companies

Listing procedure

The procedure to be taken for companies wishing to be listed in the stock market are contained in the Decree 48/1998/ND-CP The five steps are as listed below

Step 1: Organization of a Board of Directors‘ meeting

The purpose of this meeting is for the comparison of the current state of the company with the listing requirement to ascertain if the company has met these requirements It also seeks to pass a listing policy The aim of such a meeting is also to determine the issues to be discussed at the shareholders meeting and the plan of the date of such a meeting

Step 2: Organization of the shareholder‘s meeting

This meeting seeks to call for a vote decision on whether to offer the company‘s shares for listing Necessary decisions that relate to the common stock of the company are made to ensure that the shares will be listed freely

Step 3: preparation for the listing in the stock market

This entails a preparation of the financial statements, valuation of the company, estimation of the stock prices

Preparation of the application documents and seeking the approval by the board of directors for the planned listing

Step 4: submission of the application to the SSC

Upon the completion of the application documents, the SSC verifies the documents within 45 days from the receipt of such documents

Step 5: Registration of the company for listing at the STC

Following such registration, the company is required to disclose all information as required by the government The company is also required to prepare its prospectus, submission of the application documents and finally the listing of the company‘s shares at the centre

statements in the local newspapers with ten days of completion The quarterly and semiannual reports are required within five days of completion, to be discloses in the STC bulletin

Irregular information is information that happens randomly but is likely to affect the investors‘ decisions Such information may relate to, changes in the business activities of the company, recording of losses that exceed 10% of the company‘s equity or changes in the membership of the firm‘s management Such information should be disclosed within 24 hours

2.3.6 Trading

The trading of all listed companies is conducted at the STC via a computerized trading system There are two types of these systems namely, Put Through Trading and the Automatic Order Matching The automatic order matching is an entirely computerized process that is free from human manipulation Orders are matched in order of price and time Automatic queuing processes are made upon the receipt of the sell and buy orders Orders are arranged according to price and the time The price at which an order trades is determined at 9.20am and at 10.30 am Put through Trading allows for the brokers to deal directly with each other The price is determined by the brokers The results of such negotiations are expected to be filed with the STC The settlement on such dealings is made at the STC through the bank of investment and development

2.3.7 VNINDEX

The Vietnamese Stock Market Index is calculated as a composite index of all the prices of stocks found in the STC It is the weighted price index of the current prices for the stock compared to those of the base year 28th July 2000

The index is calculated using the following formula

VNINDEX= CMC/BMC*100=

Where

CMC-represents the current sum market capitalization of listed shares

BMC-represents total market capitalization of all shares in the base year

Pit-represents the closing price at the trading session t for common share i

Qit - represents the total number of outstanding common stock i at t

Pio – represents the closing price of common stock I at the base year

Chapter III THEORETICAL FRAMEWORK AND EMPIRICAL RESULTS

3.1 Efficient Market Hypothesis

Market efficiency is defined as the speed at which information is incorporated into the prices of common shares Thus it is defined in terms of the availability of information to market participant and how this information is incorporated into the decision making process of the investors Thus, an efficient market is one where the prices adjust quickly to all the available information This type of efficiency is referred to as informational efficiency (Dimson and Mussavian, 1998) The markets require economic agents and resources as they are economic institutions Efficiency in this economic view involves the allocation of resources to the most cost effective and profitable markets This is referred to allocative efficiency Operational efficiency refers to the ability of the market to provide liquidity, rapidly and at low costs (Sharpe, 1992) In comparison to capital market efficiency, a perfect market assumes that all market participants have access to all information that is relevant to their decision making processes It also assumes that all participants act rationally to the information and that the market is frictionless to the extent that there is no transaction costs, all products are divisible

The inefficiency in developing countries‘ markets are caused by several factors among them market regulation, size, costs of trading nature of the market participants such as the investors (Dickinson and Muragu 1994)

Robert (1959) and Fama (1970) also introduced three commonly accepted levels of efficiency: weak, semi-strong and strong, all dependent upon the flow of information A market

is called weak if all information about past price movement is known and reflected in the current stock price This information is known as historical information and should not be useful in predicting future changes of price nor is trend analysis possible With weak form prices will follow a random walk

In-between strong and weak market efficiency are instances when information is released privately just slightly before it is released publicly This provides a slight advantage for some over all other normal investors Neither technical analysis nor fundamental analysis is effective since they are based on public information It also assumes that all information has already been reflected in stock prices A semi-strong efficient market assumes that public information is reflected almost instantaneously and totally in the prices of stocks It follows that since predictive analysis is not possible in a semi weak efficient market therefore higher profits are also not possible If the market is semi-strong then it implies the weak form efficiency, the strong efficiency, in addition, implies semi-strong and weak efficiency

The last form of market efficiency is a strong form This part of the hypothesis states that all information (public or private) is mirrored in a stock price In other words, an investor cannot gain the advantage because all interested parties learn the news at the same time Profits cannot

be made that exceed normal returns no matter the amount of information or research provided

No forecast of future prices is possible

The last level strong form which it is believed that all available information (including insider information) is reflected in stock prices Prices quickly adjust and investors cannot earn excess returns (above competitive) using information Forecasting is not possible

Semi-strong form implies weak form, strong form implies semi-strong and weak form efficiencies It follows that if the weak form is capable of being rejected then both the semi-strong and strong forms can also be rejected (Campbell et al 1997, 22; Fama 1970)

3.1.1 The development of Efficiency Market Hypothesis

EMH studies begun in the early twentieth century upon a empirical researches by Cowles (1933) and the theoretical contribution by Bachelier (1900) and the the formulation of the random walk for security prices by Samuelsson (1965) Early studies by various scholars carried out tests on the random walk and concluded that successive prices variations are independent These scholar include Ball (1994), Cowles and Jones (1937), Cootner (1962), Kendall (1953), Fama (1965) and Osborne (1962) The contributions by these scholars led to the formulation of the Efficient Market Hypothesis (EMH)

EMH states that information efficient markets, it is impossible to forecast price movements if the prices incorporate all the information available in the market News is randomly announced, hence, prices fluctuate randomly Market participants are not able to exploit insider information in the prediction of future prices for the individual stocks (Campbell,

et al 1997) Fama later in 1970 formalized the theory by reviewing the theoretical and empirical contributions on EMH He stated that for a market to qualify as efficient it ought to reflect all the information available Fama (1970, p.35) and Findlay and Williams 2000 determined three conditions that must prevail for a market to be efficient These are absence of transaction costs, availability of free information and that the current prices should fully reflect the all the current information These conditions ensure that not one participant has the ability to gain profits from hoarded information The prices of the stocks are representative of the intrinsic value of the stocks While investors tend to sell securities at a price that is believed to be higher than the intrinsic value or buy at a value that is believed to be lower than the intrinsic value, in an efficient market, the probability of gain is purely a game of chance as opposed to skill

The developments in the formulation of the EMH by Fama led to further classification of different levels of market efficiency The difference in the three versions of market efficiency being the meaning placed on ―all available information.‖

These are discussed below

3.1.2 Weak-form

Prices in this market follow a random walk The security prices reflect all forms of information that can be derived from the study market trading data These include a study into the trading volume and past stock prices The joint distribution of current stock prices already incorporates the past price A market that has weak form of efficiency cannot have chartering or technical analysis as it is of no use since prices already reflect these past prices (Malkiel, 1996, p.197 and Haugen 2001, p.575) Incorporating the random walk notion, Malkiel states that the best value for any security is the present value plus/minus a random error variable

The weak form of EMH is more relevant in developed markets rather than in less developed and emerging stock markets (Mobarek and Keasey, 2000)

3.1.3 Semi-Strong Form (Haugen,2001 p.575)

Additional information on semi-strong form is the presumption that all publicly available information has been reflected in the stock prices The difference between semi-strong and strong is the speed at which the prices adjust with respect to publicly available information A test would be to analyze whether the changes happened over a period of a few days or immediately Ergo, no published information helps in the selection of undervalued securities This type of study is referred to as event study (Fama 1969, p.388 and Shleifer, 2000) Conducting a fundamental analysis and technical analysis on the securities is ineffective Published information cannot be used to select overvalued and undervalued securities

There is no literature that rejects the weak and the semi strong theories

3.1.4 Strong Form

All information is reflected in stock prices, including private or inside information as well

as public information (Hagen, 2001:575) Strong form tests are not concerned with the full reflection of information in the prices insofar as no individual can expect to receive higher trading profits than others simply due to additional informational access (Coperland, Weston, 1993: 332) Thus the theory dismisses the benefits of insider information in an efficient market Once an analyst recognizes new information, it is quickly dispersed and almost immediately reflected in market prices It is important to know if all available information is totally reflected

in the stock prices because no one person can have an advantage due to personal access to some information (Fama, 1969:388) This theory postulates that at this form of efficiency even insider trading is difficult to thrive This is an extreme version that it is almost impossible to have While markets are not perfectly inefficient or perfectly efficient, investors tend to be believed that their markets are efficient However the different levels of industry analysis, technical and fundamental are always conducted on security prices, thus bringing the paradox of EMH

3.2 Empirical Evidence on Efficiency Market Hypothesis

Most of empirical researches on theory of efficient market hypothesis concern whether prices

―fully effect‖ a particular subset of information (Fama 1970) There have been extensive researches done to determine the degree to which markets are efficient Markets have been described as not ever able to conform to the strong forms of EMH Over the years only markets

of the developed countries have been considered for the study of efficiency Over the recent

years researches into the market efficiency in developing countries have been made

Especially, the empirical studies have been divided in test of weak-form, semi-strong and strong form of market hypothesis

3.2.1 Evidence from developed markets

Maria Borgers (2008) tested weak-form efficiency in 6 developed markets are France, Germany ,

UK, Greece, Portugal and Spain from 1993 to 2007 and found that returns and monthly prices follow random walk While Germany, France, Spain and UK meets almost the criteria with daily data but rejected for Portugal and Greece due to serial positive correlation

The evidence against market efficiency is that there is a positive correlation in stock returns, specifically in the short run There has been research recently on autocorrelation This research was in stock returns (Engel and Morris 1991) When long run horizons were studied, the results showed that there was found to be serial correlation that measured into the negative in the United States Fama and French (1988) Jose Benzinho et al.(2002) had examined the stock markets in Portuguese (PSI-20) and Spanish (IBEX-35), used daily data from Jan 1993 to Sep 2001 for PSI-

20 and Oct 1990 to 2001 for IBEX-35 The results provided an ambiguous evidence for random walk hypothesis in Iberian peninsula stock markets, they pointed out the unit root test do not reject the efficiency market hypothesis for two stock index while results from variance ratio tests

do Poterba and Summers (1986) have examined in US and 17 other developed markets, they found that positive serial correlation at short-term and negative serial correlation at long-term

Lo and MacKinlay (1988) are pioneers in variance ratio test Early empirical studies and researches of the EMH had been primarily based on serial correlation and runs tests, while modern tests of efficiency market have used variance ratio test Lo and MacKinlay studied 1216 weekly observations which were gleaned by Center for Research in Security Prices daily returns from Sep 6, 1962 to Dec 26, 1985 Their resulting conclusions were also negative for sub periods 608 weeks for returns indexes and size-sorted portfolios Lo and Mckinlay (1988) found that between weekly and monthly holding-period exist the positive serial correlation In opposite, French and Fama (1988) found the negative serial correlation for long-term period, Fama and French (1988) reveal that long holding-period returns are substantially correlated negative serially, indicate that 25 and 40 percent of the variation of longer-term return is indeed

predictable from past Lo and MacKinlay (1988) found that the resulting evidence was against the EMH in stock prices of small-firms, but not necessarily for large-firms

Lo and MacKinlay (1988) believe that the rejection of random walk hypothesis cannot fully be explained They contend that infrequent trading or time varying volatilities are not adequate explanation, their conclusions are based on the behaviour of small stocks Lo and MacKinlay found out that a mean-reverting model of assert prices was not supported by the rejection of the random walk for weekly returns Lee (1992) used in variance ratio test in the examination of whether stock returns of the U.S and 10 industrialized countries: United Kingdom, Australia, Canada, France, Belgium, Italy, Japan, Netherlands, Switzerland, and Germany follow a random walk hypothesis for the period 1967- 1988 Choudhry (1994) examined the structure stochastic

of individual stock indexes in seven countries: the United States, the United Kingdom, France, Germany, Japan, Canada, and Italy The Augmented Dickey-Fuller (ADF) and unit root tests, and Johansen‘s co-integration tests were applied to test of monthly stock indexes from 1953 to

1989 His findings reveal that seven stock markets are efficient during the sample period Both unit root tests results show that all seven series have a stochastic and they are non-stationary Johansen‘s method cointegration used to check for common stochastic trends among these stocks index All the results support for EMH, so there is additional evidence of finding for an efficient market

Chan et al (1997) tested for the weak-form of 18 international stock markets (United States, Australia, Belgium, Canada, Denmark, Finland, France, Germany, India, Italy, Japan, Netherlands, Norway, Pakistan, Spain, Sweden, Switzerland, the United Kingdom) during period January 1962 to December 1992 , with 384 monthly observations used Phillips-Peron (PP) unit root and cointegration to test They concluded that all sample stock markets were weak-form efficient

3.2.2 Evidence from Emerging Stock Markets

The growth of emerging markets were impressive, they‘re attract by their low correlation with primary developed markets Additionally, by the systematic patterns, they‘re more predictable stock returns than developed markets Abd Halim et al (2010) examined 15 emerging markets (Argentina, Brazil, Chile, Colombia, India, Jordan, South Korea, Malaysia, Mexico, Nigieria, Pakistan, Philippines, Taiwan, Thailand, Zimbabwe) during the period 1985-2006 whether mean reversion property hold They applied a new panel stationarity developed tested by Carrion-i-Silvestre et al.(2005) and panel unit root test by Im et al.(2005) to accommodate multiple break, and the results show that stock prices follow a random walk process, and majority of stock prices are governed by a mean reverting process Then the past information is useful to predict the future prices in the most markets

Velimir Sonje et al (2011) applies statistical test of autocorrelation of returns and moving average crossover trading rule to test whether Croatian stock market(CROBEX) efficient as U.S

markets (S&P 500) in 2002-2010 period, the result due to impact of crisis period 2008-2009 Velimir Sonje et al (2011) analyzed autocorrelation of the daily frequencies which shows that both markets are inefficient, however during the pre-crisis period; US market appears to be efficient, while Croatian stock market is impossible to prove inefficient SMA (Simple Moving Average) crossover trading rule beat the CROBEX in 1997-2010 periods with more losses than gains, the results shows that market is inefficient

In Barnes (1986) study, he find out a high degree of efficiency in Kuala Lumper market, inspite

of thinness of the market while Laurence (1986) used runs test and autocorrelation to test two stock market are Kuala Lumper and Singapore and concluded that bot markets are not weak-form efficient

According to Lim Kai Je et al (2012), they used Jarque-Bera test, Ljung-Box Q test and parametric runs test, ADF to test efficiency in Mongolian stock market over Jan 1999 to Jul 2012 and the results indicates Mongolian is not efficiency stock market In Jarque-Bera test, the data exhibits positive skewness and high level of excess kurtosis They found evidence to against null hypothesis of no autocorrelation in Ljung box Q and Runs test In the final test random walk by ADF and Chow-Denning Multiple Variance Ratio (MVR), the results reject null hypothesis and evidence against random walk hypotheis even after adjust for heteroscedasticity in MVR test Chang et al (1996) examined the weak form of the efficiency market hypothesis using monthly data on the Taiwan stock market They applied the Ljung-Box Q, runs and the unit root tests, and found that is a weak-form efficient Malaikah (1992) examined efficiency for the Kuwait and Saudi Arabian stock markets; they used daily data stock returns of two stock markets for the time period 1985 to 1989 by using the autocorrelation test They found that that the Kuwait stock market was efficient, but the Saudi Arabian market was not

non-Miller et al (1994) model suggests that returns should be adjusted in accordance with the results found in the removal of the impact of thin trading, and a moving average model (MA) that reflects the number of non trading days There are many studies which used this model which introduced by Miller et al (1994) Antoniou et al (1997) gathered the data from the daily stock prices of the ISE Composite Index for the period 1988 to 1993 to examine the weak form efficiency for the Istanbul Stock Exchange (ISE) Despite the improvement with adjusted returns, they nonetheless found serial dependence in returns The results conclusion points to the ISE as being weakly inefficient

Recently, Mustafa and Nishat (2007) found Karachi stock market is efficient They also implied thin trading and non-linearity which proposed by Miller et al (1994) during Dec 1991-May 2003 period, with three non-overlapping periods (December 1991 to May 1998; May 1998 to September 2011; and September 2001 to May 2003) and one combined period (May 1998 to May 2003) In their study, they found that Karachi stock market is efficient for three sub-periods, and combined one in linear and non-linear after adjustment for thin trading

Howard Griffiths (2010) tested weak-form efficiency market hypothesis in S&P 500 and Hangseng stock market by autocorrelation function test and runs test The weekly data collected from 2006-2010 which is sub-period is pre-crisis 2006-2008 and crisis period of 2008-2010 He concluded that there are no systematic excess returns to be gained and two markets could not be beaten consistently using trading rule

Scott Niblock and Keith Sloan (2007) analysed based on daily data of Shanghai A, Shanghai B, Shenzen A, Shenzen B during 2002-2005 period to test efficiency market hypothesis weak-form

in China They used Serial coefficient tests, Runs test, Variance Ratio tests, and Granger Causality They got the results which support that China‘s stock markets are not weak-form efficient despite efforts by governemt in financial reform and improved regulation

Saqib Nisar and Muhammad Hanif (2012) have examined the weak form efficiency in seven stock markets in Asia-Pacific (Nikke N225-Japan, Shanghai Composite-China, Kospi-Korea, Hangseng-Hong Kong, All Ordinaries ASX-Australia,KSE 100-Pakistan, and BSE SENEX-India) They used daily, weekly, monthly for 14 years (June 1997-June 2011), and the methodology applied are runs test and varicane ratio test The results indicates three of out seven stock markets not follow random walk hypothesis hence Nikke N225, Kospi, Hangseng, All Ordinaries ASX are weak form efficient markets

There have been a number of other studies concentrated in the emerging European markets For example, Hassan et al (2006) tested efficiency in seven European as emerging stock markets was employed by used International Finance Corporation‘s (IFC) weekly stock index data for the period December 1988 through August 2002 They used different methods to test, include Ljung-Box Q-statistic, runs, and variance ratio tests According to their results, they found that returns of Greece, Slovakia and Turkey are unstable over time, and conclude that Europe emerging market overall are unpredictable

Smith and Ryoo (2003) used multiple variance ratio tests They used weekly information and data of index prices during period April 1991 to August 1998 to tests efficiency hypothesis in 5 markets are: Greece, Hungary, Poland, Portugal, and Turkey They found that in four markets, the random walk hypothesis is rejected because returns have autocorrelation errors In Istanbul stock market , it has higher turnover than others in 1990s, stock price follow by random walk Liquidity is greater in Istanbul than other markets in sample; hence Istanbul has active price information process with important implication for weak form efficient

Another study were investigated in Polish stock market by Marcin Kalinowski (2009) tested semi-strong form efficiency market hypothesis in Polish stock market from the point of view in 2005-2008 He demonstrated the correlation between capital market prosperity and information efficiency on this market To prove the market influence semi-strong information efficiency, he has research the level of fundamental analysis ratios P/E and P/BV and compare these ratio to satisfactory ROI (Return on Investment) He got the results show that Polish market efficiency is