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Testing the weak form of efficient market hypothesis for socially responsible and Shariah indexes in the USA

Author

Listed:
  • Abbas Khan
  • Muhammad Yar Khan
  • Abdul Qayyum Khan
  • Majid Jamal Khan
  • Zia Ur Rahman

Abstract

Purpose - By testing the weak form of efficient market hypothesis (EMH) this study aims to forecast the short-term stock prices of the US Dow and Jones environmental socially responsible index (SRI) and Shariah compliance index (SCI). Design/methodology/approach - This study checks the validity of the weak form of EMH for both SCI and SRI prices by using different parametric and non-parametric tests, i.e. augmented Dickey-Fuller test, Philip-Perron test, runs test and variance ratio test. If the EMH is invalid, the research further forecasts short-term stock prices by applying autoregressive integrated moving average (ARIMA) model using daily price data from 2010 to 2018. Findings - The research confirms that a weak form of EMH is not valid in the US SRI and SCI. The historical data can predict short-term future price movements by using technical ARIMA model. Research limitations/implications - This study provides better guidance to risk-averse national and international investors to earn higher returns in the US SRI and SCI. This study can be extended to test the EMH of Islamic equity in the Middle East and North Africa region and other top Islamic indexes in the world. Originality/value - This study is a new addition to the existing literature of equity investment and price forecasting by comparing and investigating the market efficiency of two interrelated US SRI and SCI.

Suggested Citation

  • Abbas Khan & Muhammad Yar Khan & Abdul Qayyum Khan & Majid Jamal Khan & Zia Ur Rahman, 2021. "Testing the weak form of efficient market hypothesis for socially responsible and Shariah indexes in the USA," Journal of Islamic Accounting and Business Research, Emerald Group Publishing Limited, vol. 12(5), pages 625-645, July.
    • Handle: RePEc:eme:jiabrp:jiabr-02-2020-0055
    DOI: 10.1108/JIABR-02-2020-0055
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    Cited by:

    1. Daouda Lawa Tan Toe & Mamadou Toe & Tibi Didier Zoungrana, 2023. "Investigating the weak and semi-strong forms of Informational Efficiency on the West African Economic and Monetary Union’s Stock Exchange (BRVM) through returns predictability tests," SN Business & Economics, Springer, vol. 3(9), pages 1-27, September.

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