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Testing market efficiency on the Johannesburg Stock Exchange using the overlapping serial test

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Abstract

It has been suggested that stock exchanges may be tested for market efficiency by using tests for assessing random number generators. This paper uses such a test to assess the efficiency of small, mid and large cap indices on the Johannesburg Stock Exchange, while making adjustments for thin trading which occurs during the sample period. The efficiency of these indices is examined using individual share level data as well as index level data over a stable period and a period containing the 2008 financial crisis. This study finds evidence suggesting that small cap stocks exhibit a high degree of non-randomness in price movements. Some inefficiencies also appear to be present in mid and large cap stocks, however to a much lesser extent, with large cap stocks exhibiting higher levels of efficiency. Many of the stocks investigated appear to exhibit lower levels of efficiency during the crisis period. This may be a result of increased irrationality during periods of uncertainty.

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Notes

  1. See Roux and Gilbertson (1978) for more.

  2. The total number of shares analysed by Kruger et al. (2012) was 109. We analysed 111 shares in this paper. It is not apparently obvious if the set of shares studied by Kruger, Toerien and MacDonald is a proper subset of the set of shares studied in this paper.

  3. The number of shares removed from the sample are as follows: 32 Small, 17 Mid, and 6 Large Cap shares.

  4. The psi-square statistic could not be calculated for a small cap share despite our relaxation of Marsaglia’s (2005) assumption (see ticker YRK in Table 8 in the “Appendix”).

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Author information

Authors and Affiliations

  1. Department of Finance and Tax, University of Cape Town, Private Bag, Rondebosch, 7701, South Africa

    Michael A. Noakes & Kanshukan Rajaratnam

  2. African Collaboration for Quantitative Finance and Risk Research (ACQuFRR), University of Cape Town, Private Bag, Rondebosch, 7701, South Africa

    Kanshukan Rajaratnam

Authors
  1. Michael A. Noakes
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  2. Kanshukan Rajaratnam
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Correspondence to Kanshukan Rajaratnam.

Appendix

Appendix

See Tables 5, 6, 7, 8, 9, 10 and 11.

Table 5 Summary of tests of market efficiency on the Johannesburg Stock Exchange
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Table 6 Univariate statistics of small cap shares
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Table 7 Univariate statistics of mid cap shares
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Table 8 Univariate statistics of large cap shares
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Table 9 Results for small cap shares over the stable and unstable periods
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Table 10 Results for mid cap shares over the stable and unstable periods
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Table 11 Results for large cap shares over the stable and unstable periods
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Noakes, M.A., Rajaratnam, K. Testing market efficiency on the Johannesburg Stock Exchange using the overlapping serial test. Ann Oper Res 243, 273–300 (2016). https://doi.org/10.1007/s10479-014-1751-y

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