Efficient Market Hypothesis for Islamic Capital Markets

Efficient Market Hypothesis for Islamic Capital Markets

Hakan Altin (University of Aksaray, Turkey)
DOI: 10.4018/978-1-7998-0218-1.ch027

Abstract

This study has two important findings firstly, the theoretical results related to the efficient market hypothesis; and secondly, the results of application. The theoretical results show that if the market price of an asset includes all the information that influences its price, then that market is an efficient market. According to the efficient market hypothesis, investors cannot earn gains above the market return. Since stock share prices are unpredictable, it is assumed that when the information that the market had already been expecting is finally announced, the stock share prices will not change. That is because this announcement does not contain any information that can change the prices. The results obtained from the application show that the existence of abnormal return is valid for Islamic Stock Markets. Therefore, the findings mediate against the efficient market hypothesis. However, when the size of abnormal returns is observed, the results are almost equal to market returns. This finding supports the efficient market hypothesis. Islamic stock markets are integrated with the world at least as much as the non-Islamic global markets are. Islamic stock markets act together with the non-Islamic global markets. The risks and returns that the Islamic and non-Islamic stock markets provide to the investors are very close to each other. In conclusion, the efficient market hypothesis maintains its explanatory power for both Islamic stock markets and non-Islamic global stock markets. Islamic markets offer new investment opportunities on a global scale.
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Literature On The Efficient Market Hypothesis & Abnormalities

Pioneering works on the efficient market hypothesis and abnormalities are summarized in this literature section of the present study. These pioneering studies (which are presented in chronological order) are composed of the identification of the existence of abnormal return and comments regarding the efficient market hypothesis. In addition, it is observed that the studies on the validity of the efficient market hypothesis for Islamic markets are limited.

Key Terms in this Chapter

Adjusted Returns: The difference between the return on financial assets and the return on the market.

Johansen Cointegration Test: A method that shows the long-term cointegration relationship between multiple variables.

Abnormal Return: A gain above market return.

Vector Autoregressive Model: A method used to find the appropriate lag in simultaneous equation systems.

Efficient Market Hypothesis: A hypothesis which claims that the price of a financial asset includes all information.

Random Walk: Any movement or behavior that is unpredictable.

January Effect: Financial asset prices that are significantly different in January than in other months.

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