Testing the Weak-Form Market Efficiency for the Islamic Market Indices: Evidence from Fourier Wavelet ADF Unit Root Test

Salih Ulev () and Mervan Selçuk
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Salih Ulev: Sakarya University, Faculty of Political Sciences, Sakarya, Turkiye
Mervan Selçuk: Sakarya University, Faculty of Political Sciences, Sakarya, Turkiye

Journal of Economic Policy Researches, 2022, vol. 9, issue 2, 315-329

Abstract: Islamic stock markets and indices are a newly developing field and an essential phenomenon in the global financial system. Islamic stocks are different from conventional counterparts because they filter firms that do not comply with Shari'ah principles. The efficiency of stock markets is essential for all countries in regard to resource allocation and sustainable economic development. Therefore, many hypotheses have been developed to investigate market efficiency. The first and one of the most important of these hypotheses is the efficient market hypothesis. This paper aims to investigate the weak-form market efficiency of Islamic stock markets. For this purpose, we used 13 indices data in Dow Jones and S&P between 2011 and 2021, employing the Fourier Wavelet ADF (FWADF) Unit Root Test. The FWADF test enabled us to consider structural breaks with an unknown number, time, and form. The studies examining EMH and Islamic indices did not consider smooth changes and frequency information in wavelet-based unit root tests. Therefore, it is possible that the information for indices may have been incomplete. Adopting FWADF, our study contributes to the literature in that it uses all information about the stock market indices data in the analysis. The findings show that six Islamic market indices have unit roots, but seven indices are stationary. This means that all emerging market indices analyzed have market efficiency, but developed country indices do not. The results provide further understanding for investors and financial analysists enabling them to assess their decisions efficiently in constructing investment portfolios.

Keywords: Islamic market indices; emerging markets; market efficiency; fourier wavelet unit root test; Dow Jones; S&P JEL Classification : G11; C50; Z12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ist:iujepr:v:9:y:2022:i:2:p:315-329

DOI: 10.26650/JEPR1111585

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