Macro economic sources
Clare and Thomas (1994) draw attention to the different inferences possible from two methods of ordering stocks to form portfolios. They suggested that, “a number of sensible macro economic sources of risk were found using beta sorted portfolios, but only two factors were priced using the more familiar size sorted method. ” Their contention was to compare the results they obtained from the two-step procedure with those obtained from non-linear least squares methods.
Jasic and Wood (1994) posed that not only is the theory outdated, but also the methods used to prove it. They suggest in a time of “new and powerful time series tools” that the proof has yet to be seen. The study comprised of S&P 500, DAX, TOPIX and FTSE stock market indices over a 35-year period led them to believe that a significant informational advantage is plausible and offers concrete evidence of extreme predictability, the opposite of EMH. Antoniou, Ergul, Holmes and Priestley studied the past sequence of prices on the past sequence of volume.
They concluded that although “a unique data set from an emerging market reveals that, for a number of companies in the sample, returns appear to conform to the weak form version of the efficient markets hypothesis,” (1997). However, over half of these companies exhibited predictability in the end, adding these scholars to a list of people neither confirming nor disavowing the theory. Al-Loughani and Chappell (1997) researched this area using daily observations of the FTSE 30, taking care to ensure political ramifications were not significant.
In choosing an unchanging period for study, they anticipated resolving any implications of the context influencing the results. They concluded the weak form of an efficient market did not hold true. Furthermore, they state emphatically that the series tested did not follow the random walk pattern. In response to the Al-Loughani and Chappell study, Milionis and Moschos, posed the former did not satisfactorily interpret their results.
They contend that although the data proved the random walk nature of stock in the UK Stock Market Exchange, their findings did disprove the weak form market efficiency. They hold that basing a conclusion on one piece of information within an entire gamut is incorrect. Goodacre, Bosher and Dove (1999), studied the effects of technical analysis using individual measures such as filter rules, moving averages, and trading range breakout, proving a certain level of usefulness.
The incorporation of the three technical filters of relative strength, cumulative volume and the relationship between 50-day and 200- day moving averages, when adjusted for market movements and risk, proved unable to predict significant excess returns. These results proved unstable and they concluded that trades on larger companies fared better than small, and further posited the United Kingdom market as weak form efficient (Goodacre, Bosher & Dove 1999). Their study forms a fundamental foundation for the research done within this paper.
Gil-Alana used parametric and semi-parametric methods to test for the order of integration in stock market indexes. Using the EOE (Amsterdam), DAX (Frankfurt), Hang Seng (Hong Kong), FTSE 100 (London), S&P 500 (New York), CAC 40 (Paris), Singapore All Shares, and the Japanese Nikkei, Gil-Alana showed the unit root hypothesis stands firm (2006). In testing the theorem by using fractional representation, they bring into light some newer methods of study into the EMH (Gil-Alana 2006). This study is the second foundational basis for the research contained herein.