Stock market efficiency in Iran: unit root testing with smooth structural breaks and non-trading days

Vince, Daly and Paytakhti Oskooe, Seyyed Ali (2015) Stock market efficiency in Iran: unit root testing with smooth structural breaks and non-trading days. (Discussion Paper) Kingston upon Thames, U.K. : Faculty of Arts and Social Sciences, Kingston University. 26 p. (Economics Discussion Paper, no. 2015-06)

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Abstract

A 'flexible Fourier trend' unit root test, permitting smooth structural breaks of unknown form and dates, is used to test weak-form market efficiency in the Tehran stock market's TEPIX index. Monte Carlo experiments show that this test has low power when non-trading-day gaps in the daily data are filled with missing value codes. The test's properties for weekly returns and for data as published, with non-trading-day gaps suppressed, are better and similar to each other. Analysis of the full sample of TEPIX data as published supports a unit root null but indicates the presence of additional autocorrelation – questioning weak-form efficiency. Sub-sample analysis again finds evidence of a unit root, but also of complex autocorrelation. Support for the unit root increased in the years (2000-2004) following regulatory reform and has decreased since 2008. A Diebold and Mariano (1995) test is used to assess whether the revealed autocorrelation provides an effective basis for predicting price deviations from trend on the basis of their own history. Predictive effectiveness is found at a horizon of one trading day. We conclude that this market has not shown weak-form efficiency.

Item Type: Monograph (Discussion Paper)
Uncontrolled Keywords: Market efficiency; Unit root tests; Structural breaks; Non-trading days
Research Area: Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences (until 2017) > School of Economics, History and Politics (from November 2012)
Depositing User: Andrea Ingianni
Date Deposited: 24 Sep 2015 13:00
Last Modified: 24 Sep 2015 13:00
DOI: 2015-06
URI: http://eprints.kingston.ac.uk/id/eprint/32404

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