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Efficient Market Hypothesis in European Stock Markets

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Author Info
Maria Rosa Borges

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Abstract

This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of France, Germany, UK, Greece, Portugal and Spain, from January 1993 to December 2007. 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. The tests are performed using daily and monthly data for the whole period and for the period of the last five years, i.e., 2003 to 2007. Overall, we find convincing evidence that monthly prices and returns follow random walks in all six countries. Daily returns are not normally distributed, because they are negatively skewed and leptokurtic. France, Germany, UK and Spain meet most of the criteria for a random walk behavior with daily data, but that hypothesis is rejected for Greece and Portugal, due to serial positive correlation. However, the empirical tests show that these two countries have also been approaching a random walk behavior after 2003.

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Paper provided by Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon. in its series Working Papers with number 2008/20.

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Date of creation: Apr 2008
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Handle: RePEc:ise:isegwp:wp202008

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Postal: Department of Economics, School of Economics and Management (ISEG), Technical University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: http://www.iseg.utl.pt/departamentos/economia/

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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.
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. José Carlos Dias & Luís Lopes & Vitor Martins & José Manuel Benzinho, 2004. "Efficiency tests in the Iberian stock markets," Finance 0406001, EconWPA. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Magnus Arni Magnusson & Bruce Wydick, 2002. "How efficient are Africa's emerging stock markets?," The Journal of Development Studies, Taylor and Francis Journals, vol. 38(4), pages 141-156, April. [Downloadable!] (restricted)
  7. Panas, E E, 1990. "The Behaviour of Athens Stock Prices," Applied Economics, Taylor and Francis Journals, vol. 22(12), pages 1715-27, December.
  8. Graham Smith & Hyun-Jung Ryoo, 2003. "Variance ratio tests of the random walk hypothesis for European emerging stock markets," European Journal of Finance, Taylor and Francis Journals, vol. 9(3), pages 290-300, June. [Downloadable!] (restricted)
  9. Smith, Graham & Jefferis, Keith & Ryoo, Hyun-Jung, 2002. "African Stock Markets: Multiple Variance Ratio Tests of Random Walks," Applied Financial Economics, Taylor and Francis Journals, vol. 12(7), pages 475-84, July. [Downloadable!] (restricted)
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