TESTING WEAK-FORM EFFICIENCY FOR THE SAUDI PARALLEL MARKET (NOMU)

Mazin Alahmadi

doi:10.46281/ijafr.v14i2.2157

Mazin Alahmadi Assistant Professor, Department of Industrial Engineering, Faculty of Engineering, King Abdulaziz University, Jeddah, Saudi Arabia https://orcid.org/0000-0001-7610-1228

DOI: https://doi.org/10.46281/ijafr.v14i2.2157

Keywords: Emerging Markets, Random Walk Theory, Unit Root Test, Autocorrelation Test, Variance Ratio Test.

Abstract

Market efficiency is essential for a thriving stock exchange and has a substantial impact on capital investments, particularly in emerging markets. This article examines the weak-form efficiency of Nomu, the Saudi Arabian parallel stock exchange. The study employed various statistical tests on the collected closing values of the Nomu index from May 1, 2019, to May 31, 2023. The return normality and stationarity were investigated using the Jarque-Bera, Augmented Dickey-Fuller (ADF), and Phillips-Perron (PP) tests. The Variance Ratio (VR) test was used to assess autocorrelation, while the Wald-Wolfowitz Runs (WWR) test was utilized to examine random walk behavior. While the Runs test indicated some randomness, all other tests rejected their null hypotheses, indicating that the Nomu market is inefficient according to the weak-form model. This inefficiency suggests that historical trading data may predict future prices, which could discourage foreign capital inflows, thereby limiting Nomu's growth and investment appeal. The significance of these findings for regulators and policymakers in formulating market regulations and policies aimed at enhancing Nomu's efficiency and investor appeal cannot be overstated. This paper, with its robust methodology, is believed to be the first to evaluate the Nomu market's weak-form efficiency since its inception, contributing to a better understanding of market dynamics in emerging stock exchanges.

JEL Classification Codes: C12, G14, F21.

References

Al-Faryan, M. A. S., & Dockery, E. (2020). Testing for efficiency in the Saudi stock market: does corporate governance change matter? Review of Quantitative Finance and Accounting, 57, 61-90. https://doi.org/10.1007/s11156-020-00939-0

Al-Razeen, A. M. (1997). The weak-form efficiency of the Saudi stock market. (Master’s thesis, University of Leicester, United Kingdom). Retrieved from https://hdl.handle.net/2381/31114

Al–Abdulqader, K., Hannah, G., & Power, D. (2007). A test of the weak–form of the efficient markets hypothesis for the Saudi stock market. Journal of emerging market finance, 6(2), 167-190. https://doi.org/10.1177/097265270700600202

Al Ashikh, A. I. (2012). Testing the weak-form of efficient market hypothesis and the day-of-the-week effect in Saudi stock exchange: Linear approach. International review of Business research papers, 8(6), 27-54. Retrieved from https://api.semanticscholar.org/CorpusID:14382071

AlKhazali, O. (2011). Does infrequent trading make a difference on stock market efficiency? Evidence from the Gulf cooperation council (GCC) countries. Studies in Economics and Finance, 28(2), 96-110. https://doi.org/10.1108/10867371111137102

Almuqren, A. M., & Almogbel, R. K. (2023). Assessing Weak-form Efficiency: A Case Study of the Saudi Stock Market (2000-2023). Arab Journal of Administration, 43(2), 313-328. https://doi.org/10.21608/aja.2023.206963.1429

Alturki, F. A., & Aldughaiyem, A. M. (2020). Trading Saudi stock market shares using multivariate recurrent neural network with a long short-term memory layer. International Journal of Advanced Computer Science and Applications, 11(9), 522-528. https://doi.org/10.14569/IJACSA.2020.0110963

Arltová, M., & Fedorová, D. (2016). Selection of Unit Root Test on the Basis of Length of the Time Series and Value of AR (1) Parameter. Statistika: Statistics & Economy Journal, 96(3), 47-64. Retrieved from http://www.czso.cz/statistika_journal

Asiri, B., & Alzeera, H. (2013). Is the Saudi stock market efficient? A case of weak-form efficiency. Research Journal of Finance and Accounting, 4(6), 35-48. Retrieved from https://ssrn.com/abstract=2276520

Chaker, M. N., & Sabah, A. (2018). Testing the weak form of efficiency of the stock markets in Gulf Cooperation Council countries. Journal for Global Business Advancement, 11(3), 376-392. https://doi.org/10.1504/JGBA.2018.096334

Charles, A., & Darné, O. (2009). Variance‐ratio tests of random walk: an overview. Journal of economic surveys, 23(3), 503-527. https://doi.org/10.1111/j.1467-6419.2008.00570.x

El-Temtamy, O., & Chaudhry, M. K. (2009). Are GCC Financial Markets Weak Form Efficient? An Analysis Using Multiple Variance Ratio Test. Journal of Knowledge Globalization, 2(1), 63-78. Retrieved from http://journal.kglobal.org/index.php/jkg/article/view/35

Elmokadem, M. S., & Abdelnabi, H. A. I. (2023). The efficiency of the Saudi Capital Market from its weak-form during the Corona pandemic (COVID-19)" A comparative study between the business sectors listed in the Saudi Capital Market (pp. 180-196). Paper presented at the 12th International Conference on Business and Economic Development (ICBED) 2023, New York, USA: City University of New York.

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The journal of Finance, 25(2), 383-417. https://doi.org/10.2307/2325486

Hokroh, M. (2013). An application of the weak form of the efficiency hypothesis on the Saudi Arabia stock market after Tadawul. Asian Journal of Finance & Accounting, 5(1), 386-395. https://doi.org/10.5296/ajfa.v5i1.3725

Khoj, H., & Akeel, H. (2020). Testing weak-form market efficiency: the case of Saudi Arabia. Asian Economic and Financial Review, 10(6), 644-653. https://doi.org/10.18488/journal.aefr.2020.106.644.653

Lo, A. W., & MacKinlay, A. C. (1989). The size and power of the variance ratio test in finite samples: A Monte Carlo investigation. Journal of econometrics, 40(2), 203-238. https://doi.org/10.1016/0304-4076(89)90083-3

Onour, I. A. (2004). Testing weak-form efficiency of Saudi stock exchange market. https://doi.org/10.2139/ssrn.611209

Shaalan, T. (2019). The test of the efficiency of the Saudi financial capital markets at weak form: An empirical study of the tasi index and sub-indices of the Saudi market. Accounting and Finance Research, 8(1), 183-183. https://doi.org/10.5430/afr.v8n1p183

Thadewald, T., & Büning, H. (2007). Jarque–Bera test and its competitors for testing normality–a power comparison. Journal of applied statistics, 34(1), 87-105. https://doi.org/10.1080/02664760600994539

Zebende, G., Santos Dias, R., & De Aguiar, L. (2022). Stock market efficiency: An intraday case of study about the G-20 group. Heliyon, 8(1), 1-8. https://doi.org/10.1016/j.heliyon.2022.e08808