Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul

Aliyev, F. Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul. International Journal of Financial Studies. 2019, 7, 27.

11 Pages Posted: 20 Jun 2019

Date Written: June 4, 2019

Abstract

Market efficiency has been analyzed through many studies using different linear methods. However, studies on financial econometrics reveal that financial time series exhibit nonlinear patterns because of various reasons. This paper examines market efficiency at Borsa Istanbul using a smooth transition autoregressive (STAR) type nonlinear model. I develop nonlinear ARCH and STAR models, a linear AR model and random walk model for 10 years’ weekly data and then out-of-sample forecast next 12 weeks’ return. Comparing forecast performance powers, I find that the STAR model outperforms random walk, that is Borsa Istanbul returns are predictable at the given period. The results show that the shareholders may earn abnormal return and identify the direction of the return change for the next week with at least 66% accuracy. Contrary to the linear level studies, these findings show that the Borsa Istanbul is not weak form efficient at nonlinear level within the studied period.

Keywords: market efficiency, nonlinear models, STAR, return prediction

JEL Classification: G14, C58, G12, G10

Suggested Citation

Aliyev, Fuzuli, Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul (June 4, 2019). Aliyev, F. Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul. International Journal of Financial Studies. 2019, 7, 27., Available at SSRN: https://ssrn.com/abstract=3403143

Fuzuli Aliyev (Contact Author)

Baku Engineering University ( email )

120 Hasan Aliyev str.
Khirdalan
Baku, Baku AZ0101
Azerbaijan
+994504651228 (Phone)

HOME PAGE: http://beu.edu.az/~faliyev

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