Efficiency of the Philippine stock exchange using serial correlation and variance ratio tests
Abstract
Literature regarding the efficiency of the Philippine stock markets is limited because most writers take it as a fact that the market is inefficient. This paper quantitatively tests the degree of efficiency of the market using serial correlation and variance ratio tests. In so doing, this paper points to which firms are considered efficient and otherwise. In the serial correlation test, no serial correlation accepts the efficient market hypothesis and accepts the possibility of a random walk sequence. The presence of serial correlation does not necessarily indicate inefficiency but rejects the random walk sequence. To test whether the serial correlation warrants inefficiency, this paper uses a simplified Alexander (1961) filter rule to figure whether the technical trading rule can beat the buy and hold strategy. If technical trading rule beats the buy and hold strategy, then the stock is inefficient. Otherwise, the stock is considered efficient. Since, the simplified filter rule that will be employed represents only one of infinite number of technical trading rules possible, this necessitates for a more restrictive test for efficiency: the random walk test. Here the variance ratio test comes in. A variance ratio equal to one accepts the efficient market hypothesis and that the particular stock follows a random walk. A variance ratio not equal to one does not necessarily reject the efficient market hypothesis but rejects the random walk process.
Subject Area
Finance|Economics|Economic theory
Recommended Citation
Dumlao, Luis Fanuncial, "Efficiency of the Philippine stock exchange using serial correlation and variance ratio tests" (2001). ETD Collection for Fordham University. AAI9999823.
https://research.library.fordham.edu/dissertations/AAI9999823
