Author:
Neifar Malika,Gharbi Leila
Abstract
Purpose
The purpose of this paper is to test the weak form of the efficient market hypothesis (EMH) using monthly data from 2004M08 to 2018M04 for two Canadian stock indices: the Islamic (DJICPI) and the conventional (CCSI). This paper investigates whether Islamic and/or conventional stock market would be efficient through the non-stationarity test of the stock indices.
Design/methodology/approach
The authors conduct the linearity test of Harvey et al. (2008) to identify whether the considered series has linear or nonlinear behavior. If the time series exhibits nonlinear evolution, then the authors apply nonlinear unit root tests (three KSS type tests and Sollis tests).
Findings
Linearity test results say that LCCSI has nonlinear behavior, while Dow Jones Islamic Canadian Price Index, LDJICPI, is a linear process. Then, the findings of this paper show that only Canadian Islamic Price Index (DJICPI) has the characteristics of random walk indicating that only conventional stock markets are inefficient. The major implication is that in Canada, fund managers and investors can (cannot) enjoy excess returns to their investment in conventional (Islamic) stock market.
Originality/value
Numerous empirical studies of the weak EMH are carried out within a linear framework. However, stock indices can show nonlinear behavior as a result of 2008 global financial crisis. To contribute to the existing literature on the Islamic and conventional stock market efficiency, the authors take into account both structural breaks and nonlinearity. Thus, as a testing strategy for weak EMH, the authors perform (Harvey et al., 2008) linearity test to examine the presence of nonlinear behavior and correct for outliers effect when it is needed.
Subject
Strategy and Management,Accounting,Business and International Management
Reference80 articles.
1. Risk-reward trade-off and volatility performance of Islamic versus conventional stock indices: global evidence;Review of Pacific Basin Financial Markets and Policies,2020
2. Performance of Shariah and composite indices: evidence from Bursa Malaysia;Journal of Accounting and Finance,2008
3. Testing weak form efficiency on the Toronto stock exchange;Journal of Empirical Finance,2011
4. Stock market efficiency: a comparative analysis of Islamic and conventional stock markets;Physica A: Statistical Mechanics and Its Applications,2018