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Weak EMH and Canadian stock markets: evidence from linear and nonlinear unit root tests

Malika Neifar (Department of New Economics, IHEC Sfax University, Sfax, Tunisia and Department of Accounting, IHEC Sfax University, Sfax, Tunisia)
Leila Gharbi (Department of Accounting, IHEC Sfax University, Sfax, Tunisia)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Article publication date: 9 December 2022

29

Abstract

Purpose

The purpose of this paper is to test the weak form of the efficient market hypothesis (EMH) using monthly data from 2004M08 to 2018M04 for two Canadian stock indices: the Islamic (DJICPI) and the conventional (CCSI). This paper investigates whether Islamic and/or conventional stock market would be efficient through the non-stationarity test of the stock indices.

Design/methodology/approach

The authors conduct the linearity test of Harvey et al. (2008) to identify whether the considered series has linear or nonlinear behavior. If the time series exhibits nonlinear evolution, then the authors apply nonlinear unit root tests (three KSS type tests and Sollis tests).

Findings

Linearity test results say that LCCSI has nonlinear behavior, while Dow Jones Islamic Canadian Price Index, LDJICPI, is a linear process. Then, the findings of this paper show that only Canadian Islamic Price Index (DJICPI) has the characteristics of random walk indicating that only conventional stock markets are inefficient. The major implication is that in Canada, fund managers and investors can (cannot) enjoy excess returns to their investment in conventional (Islamic) stock market.

Originality/value

Numerous empirical studies of the weak EMH are carried out within a linear framework. However, stock indices can show nonlinear behavior as a result of 2008 global financial crisis. To contribute to the existing literature on the Islamic and conventional stock market efficiency, the authors take into account both structural breaks and nonlinearity. Thus, as a testing strategy for weak EMH, the authors perform (Harvey et al., 2008) linearity test to examine the presence of nonlinear behavior and correct for outliers effect when it is needed.

Keywords

Acknowledgements

Conflict of interest: The authors declare no conflict of interest.

The authors would like to thank the reviewers for their suggestions on this manuscript. They would also like to acknowledge Professor Roszaini Haniffa the editor of the Journal of Islamic Accounting and Business Research for coordinating the simultaneous submission and review of this article.

Citation

Neifar, M. and Gharbi, L. (2022), "Weak EMH and Canadian stock markets: evidence from linear and nonlinear unit root tests", Journal of Islamic Accounting and Business Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JIABR-06-2021-0156

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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