Testing weak form efficiency in the South African market

Abstract

This paper furthers the work on efficiency of developing markets with specific focus on the JSE Limited. Empirical work on the efficiency of the JSE has been mixed; evidence both in favour of and against weak form efficiency is prominent. If markets are efficient new information immediately influences market prices; accordingly, prices follow a random walk and investors will not be able to continuously earn abnormal returns. Both the Augmented Dickey-Fuller and Phillips-Perron tests were employed to test whether the JSE followed a random walk between 1999 and 2014. The null hypothesis (H₀) for both tests is that the series of logarithmic returns has a unit root and is therefore weak form efficient. In both tests this H₀ is rejected, which proves that for the period under analysis the JSE was not weak form efficient. The influence of factors such as market size and liquidity on efficiency is also discussed.