Efficiency in Emerging Markets - Evidence from the Emirates Securities Market

Transcription

1 European Journal of Economics, Finance and Adminisraive Sciences ISSN Issue 2 (2008) EuroJournals, Inc hp:// Efficiency in Emerging Mares - Evidence from he Emiraes Securiies Mare Hazem Marashdeh Securiies and Commodiies Auhoriy, Abu Dhabi, UAE Tel: ; Fax: hazem@sca.ae Min B. Shresha The Souh Eas Asian Cenral Bans (SEACEN) Research and Training Cenre Kuala Lumpur, Malaysia minshresha@seacen.org Absrac This paper invesigaes wheher he soc price index in he Unied Arab Emiraes Securiies Mare mees he crierion of wea-form mare efficiency. Beside he convenional uni roo ess, he sudy applies Perron (997) models o es for a uni roo in he presence of one endogenously deermined srucural brea. The es resuls show ha he Emiraes Securiies Mare daa conains uni roo and follow a random wal, which suggess ha he mare mees he crierion of wea-form mare efficiency. Keywords: Soc Mare, Mare Efficiency, Uni Roo, Srucural Brea JEL Classificaion Codes: C2, D53, G2, G4. Inroducion The analysis of he efficien mare hypohesis has araced a grea deal of ineres in recen ime. The efficien mare hypohesis is based on he assumpion ha a any given ime, prices of socs fully reflec all he available informaion relaed o hem. According o his, a soc mare is seen as more efficien if mare relevan informaion is incorporaed ino asses prices. Under fully efficien mares, pas informaion should no affec reurns in presen period. In oher words, he efficien soc mares do no allow invesors o earn more above-average reurns wihou acceping above-average riss (Maliel 2003, p. 60). I is believed o be an applicaion of raional expecaion heory o he pricing of socs. A very imporan issue o be highlighed a his sage is ha mare efficiency does no mean ha he mare price of a soc should equal he rue value of he soc. Wha i means is ha errors in he mare price, i.e. over or under valued of he rue value, should be unbiased and randomly deviaed. Based on his argumen, he exisence of random deviaion prevens invesors from finding hose over or under valued socs. An imporan implicaion of he efficien mare hypohesis (EMH) is ha soc prices should follow a random wal, where he fuure price changes should be - for all pracical purposes - random and herefore unpredicable (Mishin, 998, p. 73). A consequence of his is ha soc mare reurn can no be prediced from previous price changes. The random wal hypohesis is associaed wih he

2 44 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) wea form of he efficien mare hypohesis. This assers ha all he informaion conained in he hisory of yeserday s soc prices are refleced in oday s soc prices. The main objecive of his paper is o es he random wal hypohesis on Emiraes securiies mare. For his purpose, he sudy will apply wo approaches. The firs approach is he convenional uni roo ess such as Augmened Dicey Fuller (ADF) and Phillips-Perron (PP) ess. The second approach is Perron (997) which ess he uni roo hypohesis in he presence of unnown srucural brea. Alhough he subjec of random wal hypohesis has been sudied before, o he exen of our nowledge no previous sudy has conduced uni roo ess in he presence of srucural change o examine he random wal hypohesis in he Emiraes Securiies Mare. This paper is organized as follows. Secion 2 presens he lieraure review on efficien mare hypohesis in he conex of soc mares. An overview of he Emiraes soc mare is presened in Secion 3. Secion 4 oulines he daa and mehodology used in his sudy. Secion 5 presens he es saisics and inerpres he empirical resuls. Finally, Secion 6 provides conclusion of he sudy. 2. Lieraure Review While mos of he empirical sudies on esing he EMH focus on developed soc mares in differen pars of he world, especially US, Europe and Japan, jus a few sudies shed ligh on emerging soc mare especially soc mares in he Middle Eas region. One of he earlies sudies ha focused on he Middle Eas mare was done by Buler and Malaiah (992). They examined he behavior of individual soc reurns in wo soc mares, Saudi Arabia and Kuwai, over he period They used serial correlaion mehod and run several ess o evaluae he wea form of efficiency in hese soc mares. The sudy ried o invesigae he similariies and dissimilariies of hese mares regarding exchange mechanisms and efficiency. They concluded ha insiuional facors conribue o operaional inefficiency in Saudi Arabia soc mare and less pronounced bu significan auocorrelaions is found in many Kuwaii socs similar o oher hinly raded mares. A sudy by Al-Loughani (995) used differen saisical echniques on he Kuwai soc mare index, i concluded ha his index does no follow random wal as i shows signs of saionariy. Anoher sudy by Abraham e al. (2002) esed he random wal hypohesis (RWH) and mare efficiency hypohesis for hree Gulf counries, namely Saudi Arabia, Kuwai and Bahrain. Their resuls could no rejec he RWH for Saudi and Bahraini mares, while he Kuwaii mare fails o follow a random wal, which means i is inefficien. Squalli (2005) esed for mare efficiency in he seleced secors of he Dubai Financial Mare (DFM) and Abu Dhabi Securiies Exchange (ADX) in Unied Arab Emiraes (UAE) using daily secoral indices beween 2000 and The sudy which was conduced using he Variance Raio ess rejeced he random wal hypohesis in all secors of he UAE financial mares excep in he baning secor of he DFM. The sudy also conduced he Runs ess and he resuls of his es showed ha insurance secor in he ADX o be he only wea-form efficien secor. A recen sudy by Lagoarde-Sego and Lucey (2008) invesigaed he efficiency in relaion o is heoreical underpinning in a se of seven emerging Middle-Easer Norh African (MENA) soc mares, namely, Egyp, Morocco, Tunisia, Jordan, Lebanon, Israel and Turey. The sudy analyzed he impac of mare developmen, corporae governance and economic liberalizaion on he exen of wea-form efficacy. The resuls suggesed ha he exen of wea-form efficiency in he MENA soc mares is primarily explained by differences in soc mare size. Corporae governance is facors also have explanaory power, where as he role of economic liberalizaion does no appear significan. Some of previous sudies have used uni roo ess in he presence of srucural change o examine he random wal hypohesis. Chaudhuri and Wu (2003) employed he Zivo and Andrews (992) endogenous one srucural brea es o examine he random wal hypohesis in seveneen emerging mares. They found ha for en mares, he null hypohesis of a random wal can be rejeced a per cen and 5 per cen significance level.

3 45 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) Narayan and Smyh (2004) implemened he Zivo and Andrews (992) endogenous one srucural brea es and Lumsdaine Papell (997) wo srucural breas uni roo es models o examine he random wal hypohesis for soc prices in Souh Korea. Their resuls indicae ha soc prices in Souh Korea are characerized by a uni roo, which is consisen wih he random wal hypohesis. Chanchara and Valadhani (2007) examine he random wal hypohesis and srucural breas for 6 counries, mosly wih developed mares, using Zivo and Andrews (ZA) and Lumsdaine and Papell (LP) models. The ZA es resuls provide evidence in favor of random wal hypohesis in 4 counries. However, he LP es resuls show ha he hypohesis is rejeced for 5 counries. 3. An Overview of he Emiraes Securiies Mare There are wo financial mares in he UAE: Abu Dhabi Securiies Exchange (ADX) and Dubai Financial Mare (DFM). Boh mares were esablished in he year The Emiraes Securiies Mare is elecronically lined wih he previous wo mares, esablished by he Securiies and Commodiies Auhoriy. I has is own index which covers he rading on socs for all lised companies in boh mares. The index is called The Emiraes Securiies Mare Index. The number of lised companies in he mare in 2007 sood a 20 conaining 66 companies of ADX and 54 companies of DFM. The Emiraes Securiies Mare has winessed several improvemens in is main indicaors over he las seven years. I serves as a good example of newly emerging soc mare wih significan growh poenial. Table shows he main mare developmen saisics during he period Table : The Emiraes Securiies Mare Developmen Saisics Year Price Index Mare Capializaion (Million Dirham) Mare Capializaion o GDP raio Volume Traded (Share) Value Traded (Million Dirham) Number of Transacions Lised Compan ies , ,253,923,55 9, , ,230,202 3,86 36, , ,439,842 7,458 50, , ,069,276,45 66, , , , ,8,933, ,868 2,300, , , ,939,87,239 48,49 3,38, , , ,38,4,84 554,334 3,354,67 20 Source: Securiies and Commodiies Auhoriy, Abu Dhabi, UAE The Emiraes soc price index has increased sharply from 6.7 in 200 o in 2007 regisering an annual average increase of abou 43 per cen. The volume of mare capializaion has recorded a 6 fold increase in six years ime while he mare capializaion o GDP raio increased from 9.8 per cen in 200 o 8. per cen in The raded value has surged up more han 300 imes in he same period while he number of lised companies has grown rapidly from 27 companies in 200 o 20 companies in Figure shows he daily movemen in he Emiraes soc price index beween 3 Augus 2003 and 3 April I can be seen from he figure ha he soc price index saw a slow growh unil November 2004, increased sharply beween December 2004 and November 2005, declined sharply beween December 2005 and July 2006, remained sagnan beween Augus 2006 and Sepember 2007, and sared o pic up afer Ocober Figure 2 shows ha he soc prices highly flucuaed beween March 2005 and May 2006 and beween Augus 2007 and February 2008 periods.

4 46 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) Figure : The Emiraes Soc Mare Index 8,000 7,000 6,000 Index 5,000 4,000 3,000 2,000, /08/ // /02/2004 3/05/2004 3/08/ // /02/2005 3/05/2005 3/08/ // /02/2006 3/05/2006 3/08/ // /02/2007 3/05/2007 3/08/ // /02/2008 Dae Daa Source: Securiies and Commodiies Auhoriy Abu Dhabi, UAE Figure 2: The Firs Difference of Emiraes Soc Mare Index Index /09/2003 0/2/2003 0/03/2004 0/06/2004 0/09/2004 0/2/2004 0/03/2005 0/06/2005 0/09/2005 0/2/2005 0/03/2006 0/06/2006 0/09/2006 0/2/2006 0/03/2007 0/06/2007 0/09/2007 0/2/2007 0/03/ Dae Daa Source: Securiies and Commodiies Auhoriy Abu Dhabi, UAE 4. Daa and Mehodology 4.. Descripion of he Daa This sudy employs daily soc mare index daa over he period 3 Augus 2003 o 3 April The daa are obained from Securiies and Commodiies Auhoriy (hp:// for a oal of 298 daily observaions. The soc price index is based on he soc price value in local currency.

5 47 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) 4.2 The Convenional Uni Roo Tess To es for efficien mare hypohesis in he Emiraes Securiies Mare, he sudy sars wih he convenional uni roo ess, namely he Augmened Dicey-Fuller (Dicey and Fuller 979) and Phillips-Perron (Philips and Peron 988) ess. The Augmened Dicey-Fuller (ADF) es has following models: ΔS ΔS ΔS + α 2 + βs + δ ΔS i + ε = α () + βs + δ ΔS i + ε S + δ ΔS i + ε = α (2) = β (3) where S is he soc price index a ime. The firs model (equaion ) includes a consan erm ( α ), a rend erm ( α 2 ), denoes he number of lagged erms and ε is a whie noise disurbance erm. The second model (equaion 2) includes a consan erm only, and he hird model (equaion 3) does no include inercep and rend erms. The null hypohesis of saionariy for all specificaions is β = 0. The auoregressive erm ( δ Δ m S i ) is included o ensure he residual ( ε ) is serially uncorrelaed. The Philips-Perron (PP) es inroduces a non parameric mehod o overcome he problem of serial correlaion in he error erm. In mos cases he PP ess gives similar resuls as he ADF es. The PP es has following specificaion: Δs = α + ρs + u Equaion (4) is esimaed by using he ordinary leas square (OLS) mehod Tesing for Uni Roo in he Presence of Srucural Brea Perron (989) argued ha he convenional ADF and PP uni roo ess are biased owards he nonrejecion of he uni roo null hypohesis in he presence of srucural breas. These ess lac power in he presence of srucural breas in he series and hey may fail o show wheher a series is firs difference saionary (Wilson e. al. 2003, p.445). Perron (989) perceived his phenomenon and proposes a uni roo es ha allows for a srucural change a a nown dae by incorporaing dummy variables for he srucural change ino ADF es. Subsequen wors based on Perron (989) have developed models ha allow a srucural change a an unnown dae in which he choice of he brea poin is deermined endogenously (see Zivo and Andrews 992, Banerjee e al 992, Perron and Vogelsang 992, and Perron 997). This approach is preferred because any arbirarily fixed dae can be subjec o criicism of daa mining (Lai 2004). This sudy uses Perron (997) procedure as i is he mos comprehensive one compared o all oher models. Perron (997) saisical procedure includes boh Innovaional Oulier models, namely IO and IO2 and he Addiive Oulier model (AO). These models es for a uni roo allowing for he presence of srucural change in he rend funcion occurred a mos once. These ess are considered o be more robus and powerful han he convenional uni roo ess. In he IO models, he change is assumed o occur gradually while in he AO model, he change is assumed o occur insananeously. Among he wo IO models, IO allows for he occurrence of gradual change in he inercep of he rend funcion. I has he following represenaion: s + ciδs + i = μ + β + θdu + δdt + αs e (5) where DU = if > Tb, 0 oherwise. DT =, T + 0 oherwise. b = b b (4)

6 48 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) IO2 model is he mos inclusive model as i allows for he occurrence of changes in boh he inercep and he slope of he rend funcion. The null hypohesis α = is esed using he -saisic. The IO2 model is as follows: s + ciδs + i = μ + β + θdu + γdt + δdt + αs e (6) b where = () if, 0 oherwise. The hird model is an Addiive Oulier model (AO) ha allows for a sudden and rapid change o he rend funcion. This model uses a wo-sep procedure. Firs, he series is de-rended as follows: s = μ + β + γdt * ~ + s (7) * where DT = ( T b ) if > Tb, 0 oherwise. The es is hen performed using he -saisic for α = in he regression: + c Δ~ i s i + ~ s = α ~ s e (8) The selecion of he order of lag employs he general-o-specific procedure based on he significan -saisic of he coefficien associaed wih he las included lag in he esimaed regression. To deermine he ime of he brea poin endogenously a an unnown brea poin, he ime of he brea T b is seleced as he value ha minimizes he -saisic for esing. α = 5. Empirical Tes Resuls The resuls of he ADF and PP ess conduced a levels and a firs difference are given in ables 2 and 3. The resuls repored in Table 2 show ha boh he ADF and he PP fail o rejec he null hypohesis of a uni roo in he daily Emiraes soc price index a levels. The resuls in Table 3 indicae ha he - saisics for boh he ADF and he PP models are greaer han heir respecive criical values for he soc price index a firs difference. This suggess ha he uni roo hypohesis is rejeced. From hese resuls, i can be inferred ha he Emiraes soc price index is non-saionary and becomes saionary a firs difference, in oher words, hey follow a random wal. Table 2: ADF and PP Uni Roo Tes Resuls a Levels Null Hypohesis: INDEX has a uni roo Tes Type -Saisics Criical Value % Criical Value 5% Inference Augmened Dicey Fuller (ADF) Do no rejec Phillips-Perron(PP) Do no rejec Table 3: ADF and PP Uni Roo Tes Resuls a Firs Difference Null Hypohesis: INDEX a firs difference has a uni roo Tes Type -Saisics Criical Value % Criical Value 5% Inference Augmened Dicey Fuller (ADF) Rejec Phillips-Perron(PP) Rejec The es resuls of Perron (997) models are presened in Table 4. The saisics for α T for all he hree models, namely, IO2, IO and AO are below he criical values in absolue erms a per cen significance level. These resuls show ha all he hree models of Perron (997) find uni roo in he Emiraes soc price index. Boh he Innovaional Ouliers models (IO and IO2) sugges ha here exis a srucural brea in Emiraes soc price index on 22 January 2006 while Addiive Oulier model (AO) indicaes a srucural brea on 0 June I is no surprising ha boh srucural breas in he Emiraes soc price index occurred during a period of an excepional price increases (he year 2005) and a period of a price correcion (he year 2006).

7 49 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) Table 4: Perron (997) Uni Roo Tes Resuls Model Innovaional Oulier Model IO2 Innovaional Oulier Model IO Addiive Oulier Model AO Brea Dae (T b ) 22/0/ /0/ /06/ Criical values for T = : % 5% 0% IO IO AO Figures in braces are Suden -Saisics β Ө γ δ T = Inference (3.3060) (.0624) (-.4248) (.0624) Uni roo n.a. (3.9876) ( ) (.0273) Uni roo n.a. (5.2446) ( ) n.a Uni roo 6. Conclusion This paper examines he efficien mare hypohesis in Emiraes soc mare employing convenional Augmened Dicey Fuller and Philip-Perron ess along wih Perron s Innovaional Oulier and Addiive Oulier models which allow an endogenously deermined srucural brea in daa. All hese models show ha he Emiraes soc mare index has a uni roo and follows a random wal. This is consisen wih he wea-form of he efficien mare hypohesis suggesing ha pas movemens in soc prices canno be used o predic heir fuure movemens. The presence of random wal in he soc price daa has imporan implicaions for issuers of equiy and porfolio invesors. The efficiency in he soc mare can arac foreign porfolio invesmen; encourage he domesic savings and improving he pricing and availabiliy of capial. This has imporan implicaions for he allocaion of capial wihin an economy and hence overall economic developmen.

8 50 European Journal of Economics, Finance And Adminisraive Sciences - Issue 2 (2008) References ] Abraham, A., J. Fazal and A. Sulaiman (2002). Tesing he random wal behavior and efficiency of he Gulf soc mares. The Financial Review, 37, ] Al-Loughani, N. E. (995). Random wal in hinly raded soc mares: The case of Kuwai. Arab Journal of Adminisraion Science, 3, ] Banerjee, A., R. L. Lumsdaine and J. Soc (992). Recursive and sequenial ess of he uniroo and rend-brea hypohesis: Theory and inernaional evidence. Journal of Business and Economic Saisics, Vol. 0, pp ] Ben-David, D. and D. H. Papell (997). Slowdowns and meldowns: poswar growh evidence from 74 counries, NBER Woring Paper, No ] Buler, K. C. and S. Malaiah (992). Efficiency and inefficiency in hinly raded soc mares: Kuwai and Saudi Arabia. Journal of Baning and Finance, Vol. 6, pp ] Chanchara, Surachai and A. Valadhani (2007). Tesing for random wal hypohesis and srucural breas in inernaional soc prices. Universiy of Wollongong, Woring Paper, No ] Chaudhuri, K. & Wu, Y. (2003). Random wal versus breaing rend in soc prices: evidence from emerging mares. Journal of Baning and Finance 27, ] Dicey, D. A. and A. F. Wayne (979). Disribuion of he esimaors for Auo-regressive ime series wih a uni roo. Journal of American Saisical Associaion, Vol. 74, pp ] Lagoarde-Sego T. and B. M. Lucey, (2008). Efficiency in emerging mares- Evidence from he MENA region. Journal of Inernaional Financial Mares, Insiuions & Money, 8, ] Lai, K. S. (2004), On srucural shifs and saionariy of he ex ane real ineres rae. Inernaional Review of Economics and Finance, Vol. 3, pp ] Lumsdaine R. L. and D. H. Papell (997). Muliple rend breas and he uni roo hypohesis. The Review of Economics and Saisics, Vol. 79, pp ] Maliel, B., G. (2003). The Efficien Mare Hypohesis and is criics. Journal of Economic Perspecive, Vol. 7, pp ] Mishin, F. S. and S. G. Eains (998). Financial mares and insiuions. Second Ediion, Addison-Wesley, US. 4] Naryan, P. and R. Smih, (2004). Is Souh Korea s soc mare efficien?, Applied Economic Leers, Vol., pp ] Perron, P. (989). The grea crash, he oil price shoc, and he uni roo hypohesis. Economerica, Vol. 57, pp ] Perron, P. (997). Furher evidence on breaing rend funcions in macroeconomic variables. Journal of Economerics, Vol. 80, pp ] Perron, P. and T. J. Vogelsang (992). Nonsaionariy and level shifs wih an applicaion o purchasing power pariy. Journal of Business and Economic Saisics, Vol. 0, pp ] Phillips, P. C. B. and P. Perron (988). Tesing for a uni roo in ime series regression. Biomeria, Vol. 75, pp ] Squalli, Jay (2005). Are he UAE Financial Mares Efficien?. Zayed Universiy, Woring Paper, No ] Wilson, P. J., G. Richard and Z. Ralf (2003). Poenial diversificaion benefis in he presence of unnown srucural breas: An Ausralian case. Ausralian Economic Papers, Vol. 42, pp ] Zivo E. and D. W. K. Andrews (992). Furher Evidence on he grea crash, he oil-price shoc, and he uni-roo hypohesis. Journal of Business & Economic Saisics, Vol. 0, pp