Weak EMH and Canadian stock markets: evidence from linear and nonlinear unit root tests

Malika Neifar and Leila Gharbi

Journal of Islamic Accounting and Business Research, 2022, vol. 14, issue 4, 629-651

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 Harveyet 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 (Harveyet al., 2008) linearity test to examine the presence of nonlinear behavior and correct for outliers effect when it is needed.

Keywords: Canadian stock markets; DJICPI and CCSI; Linearity test of Harvey et al. (2008); Nonlinear unit root tests; Weak efficient market hypothesis (EMH) (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-06-2021-0156

DOI: 10.1108/JIABR-06-2021-0156

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