The Weak-Form Efficiency of The GCC Markets

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An Empirical Analysis on The Weak-Form Efficiency of The GCC Markets Applying Selected Statistical Tests Rengasamy Elango, Mohammed Ibrahim Hussein This paper tests for market efficiency across the seven stock markets in the GCC (Gulf Co-operation Council) countries. The GCC countries, of late, have been striving to strengthen their capital markets by introducing various innovative changes in relation to listing, regulatory, trading and settlement norms in order to improve transparency and informational efficiency. Using daily indices of the above markets between October 2001 and October 2006 and Kolmogorov –Smirnov test, we find that all the above seven markets reject the null hypothesis that the returns follow a normal distribution. Again, based on runs test for randomness, we find that the hypothesis pertaining to random walk and weak-form efficiency of the GCC markets is rejected for all the seven markets during the study period. This conclusion corroborates with the conclusions of the past studies carried out in GCC context and the developing and underdeveloped markets. The paper reiterates the need for an integrated GCC Stock market. The results and suggestions have wider implications for security analysts, investing community, stock exchanges, and other regulatory authorities in their policy decisions to improve their capital market functioning. Field of Research: Market efficiency, Random Walk, Kolmogorov – Smirnov test, Runs test for Randomness

1. Introduction
Stock markets play a crucial role in cementing the relationship between investors and the corporate sector. In this process, they help mobilizing the savings of people and direct them to the growth of trade, commerce and industrial sectors of an economy. In a nutshell, stock markets play an important role in capital formation and help fuel economic growth in the country. Looking at it from the investors’ point of view, stock market operations are often compared to operations in gambling dens, and the investors look for the right winning strategies applying innumerable techniques and methods (Ranganatham, Madhu Dr Rengasamy Elango, Faculty, Dept. of Business and Accounting, Majan College, (University College), email:; Dr Mohammed Ibrahim Hussein, Faculty, Dept. of Business and Accounting, Majan College, (University College), email:;

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mathi R, 2005)The ultimate objective, of course, is to beat the market despite the fact that most often investors are guided by the sentiments of faith and phobia. However, rational investors like to play safe and invest their hard-earned money optimally. Those investors look for organized information and logical reasoning backed by scientific methods and techniques. Since the two prime considerations of a judicious investor are the risk and return inherently present in a security, a guidance on choosing the right stock based on a scientific method would be a boon to the investors. Efficient Market Hypothesis (EMH) The principal issue from an academic viewpoint is market efficiency (Fama 1970, 1991). The Efficient Market Hypothesis (EMH) assumes that stock prices adjust rapidly to the new information, and thus, current prices fully reflect all available information. (Fama 1970), formalized the theory, organized empirical evidence and divided the EMH into three sub-hypotheses depending on the information set involved. It is an important concept, both in terms of an understanding of the working of stock and in their performance and contribution to the development of a country’s economy. If the stock market is efficient, the prices will represent the intrinsic values of the stocks and in turn, the scarce savings will be optimally allocated to productive investments in a way that benefits both individual investors and the country economy (Copeland and Weston, 1988). The...
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