Weak-form Efficient Market Hypothesis, Behavioural Finance and Episodic Transient Dependencies: The Case of the Kuala Lumpur Stock Exchange
This study utilizes the windowed-test procedure of Hinich and Patterson (1995) to examine the data generating process of KLSE CI returns series. Unlike previous studies, the present one relates the evidence to the popular weak-form EMH and behavioural finance, with the hope of offering some plausible explanations to the controversy arises between these two camps. Our econometrics results indicate that linear and non-linear dependencies play a significant role in the underlying data generating process. However, these dependencies are not stable as the results suggest that they are episodic and transient in nature. Along the line of our interpretations, we are able to offer some plausible explanations as to why weak-form EMH generally holds in KLSE, though the presence of linear and non-linear dependencies implies the potential of returns predictability. Specifically, these significant dependencies show up at random intervals for a brief period of time but then disappear again before they can be exploited by investors. Looking from a micro perspective, we are able to rationalize the co-existence of weak-form EMH and behavioural finance in KLSE when the statistical properties of random walk, linear and non-linear dependencies, which also co-exist in the time domain, are interpreted in the framework of information arrival and market reactions to that information.
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.:
- Hinich, Melvin J & Patterson, Douglas M, 1985. "Evidence of Nonlinearity in Daily Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(1), pages 69-77, January.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Hyun-Jung Ryoo & Graham Smith, 2002. "Korean stock prices under price limits: variance ratio tests of random walks," Applied Financial Economics, Taylor & Francis Journals, vol. 12(8), pages 545-553.
- David Hirshleifer, 2001.
"Investor Psychology and Asset Pricing,"
Journal of Finance,
American Finance Association, vol. 56(4), pages 1533-1597, 08.
- Barberis, Nicholas & Thaler, Richard, 2003.
"A survey of behavioral finance,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128
- De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
- Ramsey, James B. & Zhang, Zhifeng, 1997. "The analysis of foreign exchange data using waveform dictionaries," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 341-372, December.
- Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
- Diebold, Francis X. & Nason, James A., 1990.
"Nonparametric exchange rate prediction?,"
Journal of International Economics,
Elsevier, vol. 28(3-4), pages 315-332, May.
- Schachter, Stanley & Gerin, William & Hood, Donald C. & Anderassen, Paul, 1985. "I. Was the South Sea Bubble a random walk?," Journal of Economic Behavior & Organization, Elsevier, vol. 6(4), pages 323-329, December.
- Abhyankar, A & Copeland, L S & Wong, W, 1997. "Uncovering Nonlinear Structure in Real-Time Stock-Market Indexes: The S&P 500, the DAX, the Nikkei 225, and the FTSE-100," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 1-14, January.
- Brooks, Chris & Hinich, Melvin J., 1999. "Cross-correlations and cross-bicorrelations in Sterling exchange rates," Journal of Empirical Finance, Elsevier, vol. 6(4), pages 385-404, October.
- Ammermann, Peter A. & Patterson, Douglas M., 2003. "The cross-sectional and cross-temporal universality of nonlinear serial dependencies: Evidence from world stock indices and the Taiwan Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 11(2), pages 175-195, April.
- 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.
- Abhyankar, A & Copeland, L S & Wong, W, 1995. "Nonlinear Dynamics in Real-Time Equity Market Indices: Evidence from the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(431), pages 864-80, July.
- Booth, G. Geoffrey & Martikainen, Teppo & Sarkar, Salil K. & Virtanen, Ilkka & Yli-Olli, Paavo, 1994. "Nonlinear dependence in Finnish stock returns," European Journal of Operational Research, Elsevier, vol. 74(2), pages 273-283, April.
- David McMillan & Alan Speight, 2001. "Nonlinearities in the black market zloty-dollar exchange rate: some further evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 209-220.
- Ritter, Jay R., 2003. "Behavioral finance," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 429-437, September.
- Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1387-1392.
- Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," The Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July.
- John Barkoulas & Nickolaos Travlos, 1998. "Chaos in an emerging capital market? The case of the Athens Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 231-243.
- Kian-Ping Lim & M. Azali & M.S. Habibullah & Venus Khim-Sen Liew, 2003. "Are Non-Linear Dynamics a Universal Occurrence? Further Evidence From Asian Stock Markets," Finance 0308001, EconWPA.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0312012. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.