Testing the weak form EMH - An empirical study of the Swedish stock market

Abstract

This thesis investigates whether the Swedish stock market shows signs of weak form efficiency between January 2012 and January 2019. Weekly data is gathered from the OMXSPI and from three indices of different capitalization segments, namely Large cap, Mid cap and Small cap. The OMXSPI represents the whole market and the segments are used to see if there are possible patterns between size and efficiency. Each index is tested for the random walk hypothesis by employment of the Ljung-Box autocorrelation test, the runs test, the variance ratio test, the multiple variance ratio test, Wright’s test, the wild bootstrap methodology and the joint rank and signs test. The tests are complementary to cover for possible weaknesses. We find that the whole market is following a random walk, and this indicates that the Swedish market is weak form efficient. Contrasted with earlier studies, this study gives the strongest indications of efficiency. Our results, however, do not establish that the market is weak form efficient. Therefore, we propose testing if it is possible to set up trading rules that generate excess returns on the Swedish market. There are indications of a relationship between size and efficiency on the Swedish market. It is not established if this is caused by an inefficiency in the Small cap segment or not. We propose further studies to investigate whether this is due to less efficiency for small stocks, spurious autocorrelations caused by infrequent trading or both.