[Testing for the weak form of efficiency on the FTSE-100]

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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

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Abstract

This paper provides a systematic review of the weak-form market efficiency literature that examines return predictability from past price changes, with an exclusive focus on the stock markets. Our survey shows that the bulk of the empirical studies examine whether the stock market under study is or is not weak-form efficient in the absolute sense, assuming that the level of market efficiency remains unchanged throughout the estimation period. However, the possibility of time-varying weak-form market efficiency has received increasing attention in recent years. We categorize these emerging studies based on the research framework adopted, namely non-overlapping sub-period analysis, time-varying parameter model and rolling estimation window. An encouraging development is that the documented empirical evidence of evolving stock return predictability can be rationalized within the framework of the adaptive markets hypothesis.

CHAPTER 1: INTRODUCTION

In both emerging and developed economies, capital market has been seen as the major vehicle of economic growth. Among many other functions, it performs the crucial function of channelizing savings into investment (Sudhahar and Raja, 2010). Thus, capital market plays a pivotal role in the allocation of economic resources into the productive activities of the economy. This allocation takes place through the appropriate pricing of securities traded in the market. The investors can be motivated to save and invest in the capital market of a country only if the securities in the market are appropriately priced. A capital market in which stock prices fully reflect all the available information is called efficient. In fact, the information and its dissemination determine the efficiency of a capital market. That is, how quickly and correctly the security prices reflect these information show the degree of efficiency of the capital market. Therefore, capital market being a vital institution that facilitates economic development, the efficiency of capital market is a matter of interest to many parties.

In recent years, especially in the aftermath of the global financial meltdown, the study of the weak form capital market efficiency has attracted the attention of researchers, economists, and financial analysts. It is considered that more efficient and better functioning capital markets could provide greater impetus to domestic economic growth. Market efficiency refers to a state in which current asset prices reflect all the publicly available information about the security. The accepted view is that when information arises, the news spreads very quickly and is incorporated into the prices of securities without delay. Under such a condition, the current market price in any financial market could be the best unbiased estimate of the value ...