Efficient Market Hypothesis in South Africa: Evidence from a threshold autoregressive (TAR) model

Van Heerden, Dorathea and Rodrigues, Jose and Hockly, Dale and Lambert, Bongani and Taljard, Tjaart and Phiri, Andrew (2013): Efficient Market Hypothesis in South Africa: Evidence from a threshold autoregressive (TAR) model.

Abstract

This study deviates from the conventional use of a linear approach in testing for the efficiency market hypothesis (EMH) for the Johannesburg Stock Exchange (JSE) between the periods 2001:01 to 2013:07. By making use of a threshold autoregressive (TAR) model and corresponding asymmetric unit root tests, our study demonstrates how the stock market indexes evolve as highly persistent, nonlinear process and yet for a majority of the time series under observation, the formal unit root tests reject the hypothesis of stationarity among the variables. These results bridge two opposing contentions obtained from previous studies by concluding that while a number of stock prices under the JSE stock market may not evolve as pure unit root processes, the time series are, however, highly persistent to an extent of being able to be deemed as weak-form efficient.

• Item Type: MPRA Paper
• Language: English
• Keywords: Keywords: Efficient Market Hypothesis (EMH), Johannesburg stock Exchange (JSE), South Africa, Threshold Autoregressive (TAR) model, Unit Roots.
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Abyyankar A., Copeland L. and Wong W. (1997), “Uncovering the nonlinear structure in real-time stock indices: The S&P 500, the DAX, the Nikkei 225 and the FTSE-100”, Journal of Business and Economic Statistics, Vol. 15, 1-14.

Albano G., La Rocca M. And Perna C. (2013), “Testing the weak-form market efficiency: Empirical evidence from the Italian stock exchange”, Neural Nets Surroundings: Smart Innovation, Systems and Technologies, Vol. 19, 227-236.

Andrews D. and Chen W. (2001), “Approximately median-unbiased estimation of autoregressive models”, Journal of Business and Economic Statistics, Vol. 12, 187-204.

Bec F., Salem M. and Carrasco M. (2004), “Tests for unit roots versus threshold specification with an application to the purchasing power parity relationship”, Journal of Business and Economic Studies, Vol. 22, No. 4, 382-95.

Bonga-Bonga L. (2012), “The evolving efficiency of the South African stock exchange”, International Business and Economics Research Journal, Vol. 11, No. 9, 997-1002.

Bonga-Bonga L. and Makakabule M. (2010), “Modelling stock returns in the South African stock exchange”, European Journal of Economics, Finance and Administrative Sciences, Vol. 19, 168-177.

Boyd J. and Smith B. (1998), “The evolution of debt and equity market in economic development”, Economic Theory, Vol. 12, 519-560.

Caner W and Hansen B. (2001), “Threshold autoregression with a unit root”, Econometrica, Vol. 69, No. 6, 1555-1596.

Diebold F. and Kilian L. (2000), “Unit root tests are useful for selecting forecasting models”, Journal of Business and Economic Statistics, Vol. 18, 265-273.

Enders W. and Granger C. (1998), “Unit root tests and asymmetric adjustment with an example using the term structure of interest rates”, Journal of Business and Economic Statistics, Vol. 16, No. 3, 304-311.

Fama E. (1965), “The behaviour of stock markets”, Journal of Business, Vol. 38, 34-105.

Fama E. (1991), “Efficient Capital Markets”, The Journal of Finance, Vol. 46, No. 5, 1575-1617.

Greenwood J. and Smith B. (1997), “Financial markets in development and the development of financial markets”, The Journal of Political Economy, Vol. 21, 145-181.

Gupta R. And Basu P. (2007), “Weak for efficiency in India”, International Business and Economics Reserach Journal, Vol. 6, 57-64.

Hansen B. (2000), “Sample splitting and threshold estimation”, Econometrica, Vol. 68, No. 3, 575-603.

Hasanov M. and Omay T. (2007), “Are the transition stock markets efficient? Evidence from nonlienar unit root tests”, Central Bank Review, Vol. 2, 1-12.

Jammine A. and Hawkins D. (1974), “The behaviour of some share indices: A statistical analysis”, South African Journal of Economics, Vol. 42, No. 1, 27-35.

Jawadi F., Bruneau K. And Sghaier N. (2009), “Nonlinear cointegration relations between non-life insurance premiums and financial markets”, The Journal of Risk and Insurance, Vol. 76, No. 3, 753-783.

Jefferis K. and Smith G. (2005), “The changing efficiency of the African stock markets”, South African Journal of Economics, Vol. 73, No. 1, 54-67.

Knight R. And Affleck-Graves J. (1983), “The efficient market hypothesis and the change in LIFO: An empirical study on the JSE”, Investment Analysis Journal, Vol. 21, 21-33.

Kohers T., Pandey V. And Kohers G. (1997), “Using nonlinear dynamics to test for market efficiency amoung the major US stock exchanges”, Quarterly Review of Economics and Finance, Vol. 37, 523-545.

Lee C., Tsong C. And Lee C. (2013), “Testing for the efficient market hypothesis in stock prices: International evidence from nonlinear heterogeneous panels”, Macroeconomic Dynamics, FirstView Articles, 1-6.

Li W. and Lam K. (1995), “Modelling asymmetry in stock returns by a threshold autoregressive conditional heteroscedastic model”, Journal of the Royal Statistical Society Series D, Vol. 44, No. 3, 331-341.

Lim K. (2011), “The evolution of the stock market efficiency over time: A survey of the empirical literature”, Journal of Economic Surveys, Vol. 25, No. 1, 16-108.

Munir Q. and Mansur K. (2009), “Is Malaysian stock market efficient? Evidence from threshold unit root tests”, Economics Bulletin, Vol. 29, No. 2, 1359-1370.

Narayan P. (2006),”Are the Australian and New Zealand stock prices nonlinear with a unit root?”, Applied Economics, Vol. 37, 2161-2166.

Narayan P. (2006), “The behaviour of US stock prices: Evidence from a threshold autoregressive model”, Mathematics and Computers in Simulation, Vol. 71, 103-108.

Nisar S. and Hanif M. (2012), “Testing weak-form of efficient market hypothesis: Empirical evidence from South-Asia”, World Applied Sciences Journal, Vol. 17, No. 4, 414-427.

Ntim C., Opong K., Danbolt J. and Dewotor F. (2011), “Testing the weak-form efficiency in African stock markets”, Managerial Finance, Vol. 37, No. 3, 195-218.

Osborne M. (1962), “Periodic structure in the Brownian motion in the stock prices”, Operational Research, Vol. 10, 345-379.

Oskooe S. (2011), “Stock market efficiency from nonlinear unit root test”, Proceedings of the World Congress on Engineering, July.

Pandey V, Kohers T. and Kohers G. (1998),”Deterministic nonlinearity in the stock returns of major European markets and the United States”, Financial Review, Vol. 33, 45-63.

Robinson J. (2005), “Stock price behaviour in emerging markets: Tests for weak form market efficiency on the Jamaican stock exchange”, Social and Economic Studies, Vol. 54, No. 2, 51-69.

Schaller H. and van Norden S. (1997), “Regime switching in stock market returns”, Applied Financial Economics, Vol. 7, 177-191.

Shively P. (2003), “The nonlinear dynamics of stock prices”, The Quarterly Review of Economics and Finance, Vol. 43, 505-517.

Wickremasinghe G. (2005), “Efficiency of foreign exchange markets: a developing country perspective”, Asian Academy of Management Journal, Vol. 10, No. 1, 1-17.