Testing weak form efficiency of the Helsinki Stock Exchange
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School of Business |
Master's thesis
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Authors
Date
2024
Department
Major/Subject
Mcode
Degree programme
Economics
Language
en
Pages
64
Series
Abstract
This thesis analyses the weak form efficiency of Helsinki Stock Exchange, by assessing if the market follows a random walk. A market is considered weak form efficient, if all historical information is priced into the current value of the securities, with no possibilities to determine future price changes from historical changes. This would also imply independence of the price process, where successive changes would not contain serial correlation, and be random. The thesis aims on finding evidence for or against the efficiency of Helsinki Stock Exchange by analyzing the random walk properties of the market on an index-level. Multiple statistical methods were utilized. These include the runs test, multiple variance ratio tests and unit root tests. Both the runs and the variance ratios directly assess the random walk hypothesis, while the unit root test only tests a necessary condition of the hypothesis, namely non-stationarity. Helsinki Stock Exchange was concluded to be weak form efficient during 2009-2023. Market was shown to move towards random walk behavior in the period of 1988-2023, indicating increase in efficiency. Even though random walk hypothesis is not a strict measure of weak form efficiency, it is being used due to its implications on the independence of returns. While consistent with international evidence on market efficiency, these findings contribute valuable insights to the context of Finland and the Nordics, where research on this topic is relatively scarce. It is important to note that this study has certain limitations: only historical data is analyzed, with focus only on linear dependencies. Practical limitations such as transaction costs are left out of the analysis. Thin liquidity may bias the results. Further research may explore non-linear dependencies that may violate the efficiency of the market.Description
Thesis advisor
Kitti, MitriVälimäki, Juuso
Keywords
efficient market hypothesis, random walk, weak form efficiency, runs test, variance ratio, unit root