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Testing the Efficient Market Hypothesis in G8 Countries: New evidence from Unit Root Tests with Fourier Shifts

Author

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  • Ilhan KUCUKKAPLAN

    (Uluslararası Ticaret ve Finansman Bölümü, Pamukkale Üniversitesi, Denizli, Türkiye)

  • Emre KILIC

    (Sermaye Piyasaları ve Portföy Yönetimi, Nişantaşı Üniversitesi, İstanbul, Türkiye)

  • Sevket PAZARCI

    (Finans ve Bankacılık Bölümü, Nişantaşı Üniversitesi, İstanbul, Türkiye)

  • Asım KAR

    (Uluslararası Ticaret ve Finansman Bölümü, Pamukkale Üniversitesi, Denizli, Türkiye)

Abstract

The aim of this study is to test the validity of the efficient market hypothesis for stock market indices in G-8 countries (USA, Germany, France, England, Italy, Japan, Canada, and Russia). The augmented Dickey-Fuller (ADF), residual augmented least squares (RALS)-ADF, Fourier-ADF, and Fourier-Kapetanios-Snell-Shin (Fourier-KSS) unit root tests are used to do this. The longest possible period was used as the analysis period by considering the data available for each index. Unlike the literature, the validity of the efficient market hypothesis for stock market indices in the G8 countries has been comprehensively and comparatively examined by simultaneously considering Fourier breaks, non-normal distribution, and non-linearity. According to the empirical findings, the null hypothesis was not be rejectable for all the unit root tests that were applied to the stock market indices from Germany, France, and Japan. In other words, strong evidence has been obtained for the validity of the efficient market hypothesis for the stock market indices from these three countries. On the other hand, the null hypothesis was rejected for Russia’s stock market index as a result of the unit root tests applied apart from ADF, with the results that emerged indicating the efficient market hypothesis to be invalid for that case. Different results were observed to have been caused by taking into account Fourier breaks and nonlinearity in other indices. The Fourier-KSS test considers the nonlinearity in a dataset using Fourier breaks and was found to provide more evidence for the invalidity of the efficient market hypothesis compared to the other types of tests. This reveals the importance of choosing the appropriate test for the data.

Suggested Citation

  • Ilhan KUCUKKAPLAN & Emre KILIC & Sevket PAZARCI & Asım KAR, 2023. "Testing the Efficient Market Hypothesis in G8 Countries: New evidence from Unit Root Tests with Fourier Shifts," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 10(1), pages 1-18, January.
    • Handle: RePEc:ist:iujepr:v:10:y:2023:i:1:p:1-18
    DOI: 10.26650/JEPR1071070
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    More about this item

    Keywords

    Efficient market hypothesis; Unit root tests with fourier break; G-8 countries; Random walk; Weak form market efficiency JEL Classification : G14 ; C22 ; G10;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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