Market Efficiency of Asian Stocks: Evidence based on Narayan-Liu-Westerlund GARCH-based Unit root test

Yaya, OlaOluwa S. and Vo, Xuan Vinh and Adekoya, Oluwasegun B. (2021): Market Efficiency of Asian Stocks: Evidence based on Narayan-Liu-Westerlund GARCH-based Unit root test.

Abstract

This study uses the recently developed Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model-based unit root test of Narayan et al. (2016) to examine the stock market efficiency of 19 Asian countries, using daily prices. The model flexibly accounts for heteroskedasticity and two structural breaks, the presence of which can lead to inaccurate results if neglected. Our results disclose the stock markets of 14 countries as inefficient following the rejection of the unit root null hypothesis. However, the stock markets of China, Hong Kong, Japan and the Korea Republic are adjudged efficient. We further extend the model to accommodate a maximum of five breaks to check the robustness of our results to higher breaks. We observe that the results are largely consistent except for Lebanon and Singapore. For completeness, we compare the results with those of conventional GARCH models that do not account for structural breaks and discover differing results for some countries. Hence, the role of structural breaks is not negligible in assessing market efficiency. Future studies should also incorporate heteroskedasticity and structural breaks in their modelling framework to obtain accurate results.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock market efficiency; GARCH; Unit root; Structural breaks; Asia
• Subjects: 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 > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Ali, S., Shahzad, S. J. H. and Raza, N. (2018). Stock market efficiency: A comparative analysis of Islamic and conventional stock markets. Physica A 503, 139-153.

Amer, S. (2014). Efficiency of South Asian capital markets: An empirical analysis. European Journal of Business and Management 6, 30-33.

Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, 307–327.

Comerton-Forde, C. and Putnins, T. J. (2014). Stock price manipulation: Prevalence and determinants. Review of Finance 18, 23-66.

Faiq, M., Xinping, X., Shahid, H. and Usman, M. (2010). Chinese stock market efficiency. Asian Journal of Management Research 1, 268-282.

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417.

Han, C., Wang, Y. and Xu, Y. (2019a). Efficiency and multifractality analysis of the Chinese stock market: Evidence from stock indices before and after the 2015 stock market crash. Sustainability 11, 1699. https://doi.10.3390/su11061699

Han, C., Wang, Y. and Ning, Y. (2019b). Analysis and comparison of the multifractality and efficiency of Chinese stock market: Evidence from dynamics of major indexes in different borads. Physica A 528, 121305. https://doi.org/10.1016/j.physa.2019.121305

Hassan, R. and Mohammad, S. M. (2015). Multifractal analysis of Asian markets during 2007-2008 financial crisis. Physica A 419, 746-761.

Hogue, H., Jae, H. K. and Pyun, C. S. (2007). A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets. International Review of Economics and Finance 16, 488-502.

Hu, Y. and Prigent, J. (2019). Information asymmetry, cluster trading, and market efficiency: Evidence from the Chinese stock market. Economic Modelling 80, 11-22.

Jensen, M. C. (1978). Some anomalous evidence regarding market efficiency. Journal of financial economics, 6(2/3), 95-101.

Jin, X. (2016). The impact of 2008 financial crisis on the efficiency and contagion of Asian stock markets: A Hurst exponent approach. Finance Research Letters 17, 167-175.

Kim, J. H. and Abdul, S. (2008). Are Asian stock markets efficient? Evidence from new multiple variance ratio tests. Journal of Empirical Finance 15, 518-532.

Kim, J. H., Shamsuddin, A. and Lim, K. –P. (2011). Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data. Journal of Empirical Finance 18, 868-879.

Kim, J., Doucouliagos, H. and Stanley, T. D. (2014). Market efficiency in Asian and Australasian stock markets: A fresh look at the evidence. Economics Series, Deakin University, School Working Paper No. SWP 2014/9.

Lim, K. P. and Brooks, R. D. (2011). The evolution of stock market efficiency over time: A survey of the empirical literature. Journal of Economic Surveys 25, 69-108.

Lo, A. W. (2004). The adaptive markets hypothesis. The Journal of Portfolio Management,30(5), 15-29.

Lingaraja, K., Selvam, M. and Vasanth, V. (2014). The stock market efficiency of emerging markets: Evidence from Asian region. Asian Social Science 19, 158-168.

Mensi, W., Hamdi, A. and Yoon, S. (2018). Modelling multifractality and efficiency of GCC stock markets using the MD-DFA approach: A comparative analysis of global, regional and Islamic markets. Physica A 503, 1107-1116.

Mishra, P. K. (2012). Efficiency of South Asian capital markets. Pakistan Journal of Commerce and Social Sciences 6, 27-34.

Narayan, P. K., Liu, R. and Westerlund, J. 2016. A GARCH model for testing market efficiency. Journal of International Financial Markets, Institutions and Money, 41, 121-138.

Paulo, V. (2013). The efficiency of Asian stock markets: A weak-form efficiency analysis. IJER 10, 117-136.

Rizvi, S. A. R. and Arshad, S. (2014). Investigating efficiency of East Asian stock markets through booms and busts. Pacific Science Review 16, 275-279.

Rizvi, S. A. R. and Arshad, S. (2016). How does crisis affect efficiency? An empirical study of East Asian markets. Borsa Istanbul Review 16, 1-8.

Samuelson, P.A., 1965. Proof that properly anticipated prices fluctuate randomly. Ind. Manage. Rev. 6, 41–49.

Shaik, M. and Maheswaran, S. (2017). Market efficiency of ASEAN stock markets. Asian Economic Financial Review 7, 109-122.

Shamsuddin, A. and Kim, J. H. (2010). Short-horizon return predictability in international equity markets. The Financial Review 45, 469-484.

Shleifer, A. and Vishny, R. W. (1997). The limits of arbitrage. Journal of Finance 52, 35-55.

Timmermann, A., & Granger, C. W. (2004). Efficient market hypothesis and forecasting. International Journal of forecasting, 20(1), 15-27.

Wang, H. Y. and Wang, T. T. (2018). Multifractal analysis of the Chinese stock, bond and fund markets. Physica A 512, 280-292.

Worthington, A. and Higgs, H. (2006). Weak-form market efficiency in Asian emerging and Developed equity markets: Comparative tests of random walk behaviour. Accounting Research Journal 19, 54-63.

Zhu, H. and Zhang, W. (2018). Multifractal property of Chinese stock market in the CSI 800 index based on MF-DFA approach. Physica A 490, 497-503.