Efficient market hypothesis in South Africa: evidence from linear and nonlinear unit root tests
Abstract
This study investigates the weak form efficient market hypothesis (emh)
for five generalized stock indices in the Johannesburg Stock Exchange (jse)
using weekly data collected from31st January 2000 to 16thDecember 2014.
In particular, we test for weak form market efficiency using a battery of
linear and nonlinear unit root testing procedures comprising of the classical
augmented Dickey-Fuller (adf) tests, the two-regime threshold autoregressive
(tar) unit root tests described in Enders and Granger (1998)
as well as the three-regime unit root tests described in Bec, Salem, and
Carrasco (2004). Based on our empirical analysis, we are able to demonstrate
that whilst the linear unit root tests advocate for unit roots within
the time series, the nonlinear unit root tests suggest that most stock indices
are threshold stationary processes. These results bridge two opposing contentions
obtained from previous studies by concluding that under a linear
framework the jse stock indices offer support in favour of weak formmarket
efficiency whereas when nonlinearity is accounted for, a majority of the
indices violate the weak form emh.