BCOM 436

Are Emerging Financial Markets Efficient?
Some Evidence from the Models of the Thai Stock Market


Sardar M.N. Islam

Sethapong Watanapalachaikul


Colin Clark

May 2005

Are Emerging Financial Markets Efficient? Some Evidence from the Models   of the Thai Stock Market*


Efficient Market Hypothesis (EMH) has attracted a considerable number of studies in empirical finance, particularly in determining the market efficiency of an emerging financial market. Conflicting and inconclusive outcomes have been generated by various existing studies in EMH. In addition, efficiency tests in the emerging financial markets are rarely definitive in reaching a conclusion about the issue. This paper proposes a theory-free paradigm of non-parametric tests of market efficiency for an emerging stock market, the Thai stock market, consisting of two tests which are run-test and autocorrelation function tests (ACF), to establish a more definitive conclusion about EMH in emerging financial markets. The result of this research demonstrates that an autocorrelation on Thai stock market returns exists particularly during the post-crisis period. The inefficiency of the Thai stock market follows on from the violation of the necessary conditions for an efficient market with a developed financial system and also implies financial and institutional imperfections.

1.   Introduction
The most controversial issue in finance is possibly whether the financial market is efficient in allocating or using economic resources and information or not. Other financial theory issues such as volatility, predictability, speculation and anomalies are also related to the efficiency issue and are all interdependent (Islam and Oh 2003; Mills 1999; Cuthbertson 1996), and empirical evidence provided by existing numerous tests of these issues (see Bollerslev and Hodrick (1999) in Pesaran and Wickens (1999)) is also used in supporting or rejecting efficiency in...