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Random Walk Tests for the Lisbon Stock Market

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  • Maria Rosa Borges

Abstract

This paper reports the results of tests on the weak-form market efficiency applied to the PSI-20 index prices of the Lisbon Stock Market from January 1993 to December 2006. As an emerging stock market, it is unlikely that it is fully information-efficient, but we show that the level of weak-form efficiency has increased in recent years. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. Non-trading or infrequent trading is not an issue because the PSI-20 only includes the 20 most traded shares. The tests are performed using daily, weekly and monthly returns for the whole period and for five sub-periods which reflect different trends in the market. We find mixed evidence, but on the whole, our results show that the Portuguese stock market index has been approaching a random walk behavior since year 2000, with a decrease in the serial dependence of returns.

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Bibliographic Info

Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2007/14.

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Date of creation: 2007
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Handle: RePEc:ise:isegwp:wp142007

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Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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  1. Graham Smith & Hyun-Jung Ryoo, 2003. "Variance ratio tests of the random walk hypothesis for European emerging stock markets," The European Journal of Finance, Taylor & Francis Journals, vol. 9(3), pages 290-300.
  2. Abraham Abraham, 2002. "Testing the Random Walk Behavior and Efficiency of the Gulf Stock Markets," The Financial Review, Eastern Finance Association, vol. 37(3), pages 469-480, 08.
  3. MacKinnon, James G, 1994. "Approximate Asymptotic Distribution Functions for Unit-Root and Cointegration Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 167-76, April.
  4. Nicolaas Groenewold & Mohamed Ariff, 1998. "The Effects of De-Regulation on Share-Market Efficiency in the Asia-Pacific," International Economic Journal, Taylor & Francis Journals, vol. 12(4), pages 23-47.
  5. M. Magnusson & B. Wydick, 2002. "How Efficient are Africa's Emerging Stock Markets?," Journal of Development Studies, Taylor & Francis Journals, vol. 38(4), pages 141-156.
  6. Graham Smith & Keith Jefferis & Hyun-Jung Ryoo, 2002. "African stock markets: multiple variance ratio tests of random walks," Applied Financial Economics, Taylor & Francis Journals, vol. 12(7), pages 475-484.
  7. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  8. José Carlos Dias & Luís Lopes & Vitor Martins & José Manuel Benzinho, 2004. "Efficiency tests in the Iberian stock markets," Finance 0406001, EconWPA.
  9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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Cited by:
  1. Hiremath, Gourishankar S & Bandi, Kamaiah, 2009. "On the random walk characteristics of stock returns in India," MPRA Paper 46499, University Library of Munich, Germany.
  2. Michael Batuo Enowbi & Francesco Guidi & Kupukile Mlambo, 2010. "Testing the Weak-form Market Efficiency and the Day of the Week Effects of some African Countries," The African Finance Journal, Africagrowth Institute, vol. 12(Conferenc), pages 1-26.
  3. Ana Rita Gonzaga & Helder Sebastião, 2011. "As Ações Portuguesas Seguem um Random Walk? Implicações para a Eficiência de Mercado e para a Definição de Estratégias de Transação," GEMF Working Papers 2012-02, GEMF - Faculdade de Economia, Universidade de Coimbra.

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