The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements

Studies on the Efficient Market Hypothesis (EMH) in both the developed and developing capital markets have revealed mixed evidence. EMH presupposes an ability to detect incorrectly priced securities and profitable arbitraging opportunities which move the market towards efficiency. The early emp...

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Main Author:	Md Nassir, Annuar
Format:	Thesis
Language:	English English
Published:	1991
Subjects:	Kuala Lumpur Stock Exchange Investments - Malaysia
Online Access:	http://psasir.upm.edu.my/id/eprint/8030/1/FEP_1991_3_A.pdf
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id	my-upm-ir.8030
record_format	uketd_dc
spelling	my-upm-ir.80302023-12-05T02:34:44Z The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements 1991-12 Md Nassir, Annuar Studies on the Efficient Market Hypothesis (EMH) in both the developed and developing capital markets have revealed mixed evidence. EMH presupposes an ability to detect incorrectly priced securities and profitable arbitraging opportunities which move the market towards efficiency. The early empirical work on developed securities markets purported to provide evidence that securities market prices are unbiased in their reaction to relevant information. This means that investors cannot consistently profit from any delays in price adjustment reflecting new information. However, evidence from subsequent studies, in the early 1980s, have not reached such cons is tent conclusion. These studies show anomalous price behaviour in securities markets: among others, size effects, turn of the year effects, week- end effects, etc., which are argued by some as evidence of market inefficiencies. The Kuala Lumpur Stock Exchange (KLSE) being small and illiquid provides a suitable setting to evaluate the EMH in a thinly traded scenario . In prior studies on market efficiency of the KLSE, no attempt was made to control for market thinness. In order to control for market thinness, ten portfolio deciles of KLSE listed stocks which differ in the degree of market thinness were created. The standardised volume of trading was proxied as a suitable indicator for measuring market thinness. Three tests were performed to evaluate the weak- form efficiency of the KLSE : (i) Q - statistic which measures the average serial correlations, (ii) individual serial correlations analysis (for 12 lags) and (iii) unit roots analysis. Test results on six equally-weighted dividend-distributed industry sector portfolios, two existing indices (namely the KLSE Composite Index and the New Straits Times (NST) Industrial Index) and an equally - weighted market ·portfolio (Rmt ) indicate that the KLSE Composite, the NST Indus trial and the two industry sec tors (hotel and tin sectors) exhibit average serial correlations cons is tent with weak- form efficiency. Results on the ten portfolios which differ on the degree of market thinness showed that all except three exhibit average serial correlations consistent with weak-form efficiency. For individual serial correlation results, 90 percent of the 30 component stocks of the NST Indus trial Index showed price behaviour consistent with random walk or weak- form efficiency. A unit root test was applied using a sample of stocks from each of the ten portfolio deciles. The Dickey-Fuller test of significance suggested that current prices are the best estimates of future prices. An average of 87 percent of the current price behaviour is explained by the immediate price lag variable. To evaluate the semi- strong form efficiency, an infrequently traded sample (Sample One) and a frequently traded sample (Sample Two) of annual earnings and dividend changes were used to study price react ions to information arrival. Three methods were used to estimate the residual returns: the market adjusted returns, the risk-adjusted returns and the risk-adjusted returns incorporating the Dimson, Fowler and Rorke (DFR) corrections for thin trading bias. Kuala Lumpur Stock Exchange Investments - Malaysia 1991-12 Thesis http://psasir.upm.edu.my/id/eprint/8030/ http://psasir.upm.edu.my/id/eprint/8030/1/FEP_1991_3_A.pdf application/pdf en public masters Universiti Pertanian Malaysia Kuala Lumpur Stock Exchange Investments - Malaysia Faculty of Economics and Management Ariff, Mohamad English
institution	Universiti Putra Malaysia
collection	PSAS Institutional Repository
language	English English
advisor	Ariff, Mohamad
topic	Kuala Lumpur Stock Exchange Investments - Malaysia
spellingShingle	Kuala Lumpur Stock Exchange Investments - Malaysia Md Nassir, Annuar The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements
description	Studies on the Efficient Market Hypothesis (EMH) in both the developed and developing capital markets have revealed mixed evidence. EMH presupposes an ability to detect incorrectly priced securities and profitable arbitraging opportunities which move the market towards efficiency. The early empirical work on developed securities markets purported to provide evidence that securities market prices are unbiased in their reaction to relevant information. This means that investors cannot consistently profit from any delays in price adjustment reflecting new information. However, evidence from subsequent studies, in the early 1980s, have not reached such cons is tent conclusion. These studies show anomalous price behaviour in securities markets: among others, size effects, turn of the year effects, week- end effects, etc., which are argued by some as evidence of market inefficiencies. The Kuala Lumpur Stock Exchange (KLSE) being small and illiquid provides a suitable setting to evaluate the EMH in a thinly traded scenario . In prior studies on market efficiency of the KLSE, no attempt was made to control for market thinness. In order to control for market thinness, ten portfolio deciles of KLSE listed stocks which differ in the degree of market thinness were created. The standardised volume of trading was proxied as a suitable indicator for measuring market thinness. Three tests were performed to evaluate the weak- form efficiency of the KLSE : (i) Q - statistic which measures the average serial correlations, (ii) individual serial correlations analysis (for 12 lags) and (iii) unit roots analysis. Test results on six equally-weighted dividend-distributed industry sector portfolios, two existing indices (namely the KLSE Composite Index and the New Straits Times (NST) Industrial Index) and an equally - weighted market ·portfolio (Rmt ) indicate that the KLSE Composite, the NST Indus trial and the two industry sec tors (hotel and tin sectors) exhibit average serial correlations cons is tent with weak- form efficiency. Results on the ten portfolios which differ on the degree of market thinness showed that all except three exhibit average serial correlations consistent with weak-form efficiency. For individual serial correlation results, 90 percent of the 30 component stocks of the NST Indus trial Index showed price behaviour consistent with random walk or weak- form efficiency. A unit root test was applied using a sample of stocks from each of the ten portfolio deciles. The Dickey-Fuller test of significance suggested that current prices are the best estimates of future prices. An average of 87 percent of the current price behaviour is explained by the immediate price lag variable. To evaluate the semi- strong form efficiency, an infrequently traded sample (Sample One) and a frequently traded sample (Sample Two) of annual earnings and dividend changes were used to study price react ions to information arrival. Three methods were used to estimate the residual returns: the market adjusted returns, the risk-adjusted returns and the risk-adjusted returns incorporating the Dimson, Fowler and Rorke (DFR) corrections for thin trading bias.
format	Thesis
qualification_level	Master's degree
author	Md Nassir, Annuar
author_facet	Md Nassir, Annuar
author_sort	Md Nassir, Annuar
title	The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements
title_short	The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements
title_full	The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements
title_fullStr	The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements
title_full_unstemmed	The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements
title_sort	efficient market hypothesis and the thinly traded kuala lumpur stock exchange: tests with appropriate refinements
granting_institution	Universiti Pertanian Malaysia
granting_department	Faculty of Economics and Management
publishDate	1991
url	http://psasir.upm.edu.my/id/eprint/8030/1/FEP_1991_3_A.pdf
_version_	1794018716907732992

The Efficient Market Hypothesis and the Thinly Traded Kuala Lumpur Stock Exchange: Tests with Appropriate Refinements

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