In extending the work of Gil-Alana (2006) by investigating the time-series characteristics of individual share prices, called for implementation of simple FADF test and a suite of non-linearity tests. Data from the top and bottom twenty-five companies in the FTSE 100 Index and AIM formed the basis for the investigation. The results of the study appear to cast doubt on whether larger companies in the FTSE are weak form efficient. Thus investors using a form of trading rule with these companies, operating in ‘real-time’, may be capable of profiting from these inefficiencies.
This is an interesting finding, as theory posits that stock price markets are information efficient. The findings of this study are in line with research done by Goodacre, Bosher & Dove performed in 1999. Their study concluded that large companies had more ability to perform well on the market, while smaller companies perform efficiently. Although the majority of the studies of the CRISMA system, which they considered, had been on United States data, they performed the tests on the United Kingdom.
In doing so, they posed questions as to why the United States’ data would show returns that are more dynamic. Their answer was that differences in size distribution likely
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This paper is examining the weak form market efficiency in UK stock market. According to Worthington and Higgs the deviation varies from . 0108 (United Kingdom) to . 0925 (Greece). They further analyze that in UK the returns are the slightest unpredictable. In the run test it does not come in the category of the estimated z-values where the level is . 10. They claim UK as efficient under one test or other. According to them UK satisfies the random walk criteria.
Further investigation into the possibility of inefficiencies in FTSE is recommended. One possible explanation for the inefficiency in the FTSE may be the automated trading systems of late 1980s onwards. Such systems may be institute self-perpetuating patterns, thereby creating long-memory, from which traders may profit. Given the inconclusive nature of the Hamilton-Dahl and Bai-Perron tests, the issue of whether the non-stationarity in share prices is due, in part, to non-linearity. This intimates further investigation as well.