EXAMINING THE VALIDITY OF THE WEAK AND SEMI-STRONG FORM MARKET EFFICIENCIES AT THE GLOBAL ISLAMIC STOCK MARKETS: EVIDENCE LINEAR AND NONLINEAR UNIT ROOT TESTS AND BOOTSTRAP CAUSALITY TEST APPROACH

Abstract

The objective of this paper is to test whether the validity of the weak and semi-strong form of efficient market hypothesis in selected Islamic stock markets using new econometric methods in the literature. To this end, the weak-form is examined employing linear and nonlinear unit root tests while the semi-strong form is examined employing bootstrap causality test. The unit root tests revealed that the weak form is supported for most of the Islamic stocks, indicating that stock prices fully reflect all historical information. The bootstrap causality results indicate that the semi-strong form holds in the three stock markets, namely, FTSEBMI, KATLM, and the ACWI. The overall results suggest that the investor has not a chance to make an abnormal profit in Islamic stock markets. Enhancing the efficiency of the stock markets would have a significant effect on capital allocation, equity price predictability and large and diversified of competing investors. Hence, the performance of financial markets is influenced by the validity of efficient market hypothesis and such kind of policies should be implemented.