Journal of Banking and Finance l0 (1986) 431-445.

North-Holland

WEAK-FORM

EFFICIENCY IN THE KUALA LUMPUR SINGAPORE STOCK MARKETS M a r t i n M. L A U R E N C E *

AND

The William Paterson College of New Jersey, Wayne, NJ 07470, USA

Received October 1984, final version received June 1985

Previous weak-form efficiency tests of the Kuala Lumpur and Singapore stock markets have mixed findings but mostly have suggested close conformity with a random walk. Using a disparate type of sample data over a longer and diverse time period, this paper seeks to replicate the earlier investigations of these two thin markets in order to verify whether the previous results may be sample specific. The distribution of daily stock returns is also examined to determine the validity of using statistical tests based on the normality assumption. Results tend predominately to confirm independence of serial stock returns and indicate distinctly nonnormal distributions.

1. Introduction
Prior published studies of weak-form m a r k e t efficiency o n the Stock Exchange of S i n g a p o r e (SES) a n d the K u a l a L u m p u r Stock Exchange ( K L S E ) have suggested surprisingly close a g r e e m e n t between m e a s u r e d a n d theoretically predicted b e h a v i o r of c o m m o n stock returns. U s i n g a disparate type of sample d a t a over a longer a n d diverse time period, the objective of this paper is to verify whether the previous findings are a result of the choice of d a t a samples a n d time periods studied. This s t u d y also provides empirical evidence o n the n a t u r e of the d i s t r i b u t i o n of daily stock returns in these two *The author thanks M.J. Gruber and R.G. Hawkins, New York University and L.P. Jennergren, University of Odense for helpful comments and advice. Financial support from'the Fulbright Research Abroad Program of the Office of Education, U.S. Department of Health, Education and Welfare, and the William Paterson College of New Jersey sabbatical leave and assigned research time programs permitted data collection overseas and processing in the U.S. Eswar Phadia, William Paterson College, provided:expert programming and statistical assistance. The author also is grateful to the Kuala Lumpur Stock Exchange and the Stock Exchange of Singapore for making data available and wishes, in particular, to thank Frances Kim, Lee Choy and Tan Thuan Keng for their help. Ng Goo Phai and Richard Chong Song Kee, United Malayan Banking Corp. Bhd., both provided research assistance through the kind cooperation of Dr. V. Kanapathy. The author also thanks an anonymous referee for helpful suggestions. Views expressed here do not necessarily reflect those of any institution or organization. 0378-4266/86/$3.50 9 1986, Elsevier Science Publishers B.V. (North-Holland)

432

M.M. Laurence, The Kuala Lumpur and Singapore stock markets

thin markets which has an important bearing on the choice of statistical tools used to test the efficient market hypothesis. Weak-form theory I asserts that successive returns generated by an efficient market will be independent, i.e., resemble a 'random walk'. 2 Tests on many other exchanges also have suggested rather close agreement with theory. 3 Perfect adherence to weak-form efficiency requires, among other conditions, freely available information, competition among investors and instantaneous communication. Both the SES and K L S E exist in environments where the putative conditions for weak-form efficiency are ostensibly less favorable than in most of the other markets previously investigated. A relative lack of investment data, small numbers of investors and shares, small amounts of business and financial news, no ticker tapes, little financial analysis, low degree of market regulation, and an unsophisticated communication system characterize these markets. The earlier unexpected findings, therefore, may be a result of the types of sample data or test methodologies used. The first published study of weak-form efficiency on the SES, by Ang and Pohlman (1978), used weekly data from small samples over approximately two and one-half years and inferred that the SES is efficient in the weak sense. Hong (1978a, b) studied weekly market index data and weekly share price data, unadjusted for dividends, on a sample of randomly selected firms from the SES. Hong's (1978a, b) results-are mixed, and he concluded that the random walk hypothesis cannot be rejected for the SES. D'Ambrosio (1980) tested daily closing prices of six major indices of SES for weak-form conformity with the efficient markets hypothesis and found that successive changes in some SES indices have a non-random character. In the same year an unpublished study by Lim (1980) on monthly data from very small sectoral samples of the K L S E indicated efficiency. None of the prior studies of the KLSE or SES used daily closing prices adjusted for cash and stock dividends, splits or rights issues, for a large sample of stocks, over long observation periods. Some used index data; and as Fama (1965, footnote 3) pointed out, use of market index data in random walk tests may lead to a false perception of price change dependence even when price changes of individual shares represented by the index are independent. This spurious dependence comes from the persistence of the ~Stock market efficiencyimplies that in equilibrium stock prices fully reflect all available information. Weak-form efficiencyassumes that the only information of interest in the price forming mechanism is past prices. See Fama (1965) for additional detailed definitions of market efficiencyand weak form test characteristics. ~ : 2Random walk theory assumes the current pried 6f a security reflectsall available information. Only the arrival of new information will cause the price to change. More formally, a random walk model assumes that successive one-period price changes are both independent and identically distributed. See Fama (1970, pp. 383-390). 3See Conrad and Jfittner (1973), D'Ambrosio (1980), Dryden (1970), Fama (1965,1970), Granger (1975), Jennergren and Korsveld (1975), Kemp and Reid (1971), Praetz (1969) and Solnik (1973).

M.AI. Laurence, The Kuala Lumpur and Singapore stock markets

433

effect of the market factor on stocks not trading coincidentally. Logically, in thin markets this tendency may be exacerbated and may account for some of the dependence suggested by one of the other studies of the SES which used index data. On the other hand, weekly or monthly prices are more likely to reflect adjustment to new information than daily prices and thus may explain previous findings resembling market efficiency in the SES and KLSE by other researchers. All of these previous studies used conventional methodologies which assume a normal distribution; however none of them investigated the nature of the distribution of daily returns. The shape of the distribution determines the proper types of statistical tests and the interpretation of findings. Early tests in other markets predicted normal distributions where the number of transactions per unit of time is large and transactions are spread approximately uniformly over time; but empirical results even under such conditions deviated from normality. Later weak-form market efficiency research suggested 'fat tails'; and, indeed, such distributions were discovered. [See Fama (1970, pp. 399-400).] In the KLSE and SES even the most actively traded stocks do not trade every trading day, and trading tends to 'bunch'; therefore one would expect to find non-normal shaped distributions of returns. Tests assuming normality when it in fact does not exist may account for some of the mixed findings of earlier investigators of the KLSE and SES. This paper, using daily closing prices adjusted for cash and stock dividends, splits and rights issues, of 40 individual stocks over approximately 1500 consecutive trading days, explicitly examines the shape of the distribution of returns.

2. Background of the Kuala Lumpur Stock Exchange (KLSE) and the Stock Exchange of Singapore (SES) and study data
2.1. Historical and institutional background

While early Malayan share trading activities can be traced to 1910 'barroom' transactions among brokers in Singapore, today tl~e KLSE and SES constitute formally organized equity markets in the respective independent republics of Malaysia and Singapore. From 1960 to May 24, 1973, as a consequence of their historical relationships, the two countries shared one market (exchange) for common stocks. Telephone lines linked two trading rooms approximately 250 miles apart, one in Kuala Lumpur and one in Sihgapore. However, in May 1973 the two governments terminated the interchangeability of currencies which simultaneously led to the individual incorporation of the KLSE and SES. Completely separate exchange operations commenced on June 4, 1973.4 4For more detailed and earlier historical origins see: Fact Book 78 (Stock Exchange of Singapore, Ltd., Singapore, 1978)pp. 16-18;and (Dr.) Tan Pheng Teng (1978).

434

M.M. Laurence, The Kuala Lumpur and Singapore stock markets

Transaction costs on the SES are scaled according to share prices and differ from 'ready' contracts to 'time bargain' contracts. 5 The major proportion of trading is on a 'ready' basis and most prices for industrials are greater t h a n S S 1 . 6 For shares trading at or over SS1, for ready settlement, a brokerage commission of I ~ is payable by both buyer and seller. (Minimum brokerage per transaction is S S5.) In addition there is a stamp duty of 20 cents for each S SI00 or fractional part transacted. 7 Transactions costs on the KLSE resemble those in the SES. Brokerage commissions are scaled according to share price to a maximum of 1~ on 'ready' contracts payable by both buyer and seller, a Minimum brokerage is MS5. 9 Stamp duty of MS1 for every certificate transferred is payable by transferee, and MS1 for every MS1000 (or fractional part) contracted, is payable by both buyer and seller. 1~ On both exchanges trading is by auctioning, but direct business is also permitted, t~ Traders on these exchanges are trading room clerks representing brokers who are exchange members. There were 20 member brokerage firms on the SES in 1979. t2 KLSE had 34 member brokerage firms in 1979.13 Brokerage firms may not trade for their own accounts. ~4 Approximately 260 firms' stocks are listed on the SES. Of that total about 150 are industrials; the balance are distributed rather evenly in finance, hotel, property, oil palm, tin and rubber sectors. ~5 Comparable breakdowns for the K L S E are a total of approximately 250 firms with about 135 industrials and the rest distributed nearly evenly across the same sectors. ~6 Shares of many firms are traded simultaneously on both exchanges. Total stock trading volume for 1978 on the SES was 3387 million Singapore dollars, 17 while on the KLSE total stock trading volume was 2539 million Malaysian dollars. ~8
5'Ready delivery" is for all contracts to be delivered on the second market day following the date of contract. 'Time bargain' (Settlement) is for contracts on the 1000 lot board due for delivery on the last trading day of each month or for contracts on the 'Big Board' (2,000 share lot) due for delivery at mid month on dates specified by the SES committee: Fact Book 78, op. cir., p. 18, 20. 6Stock Exchange of Singapore Journal, Vol. 7, No. 2, pp. 24, 27-80. 7Fact Book 78, op. cir., p. 70. 8No 'settlement' or 'time bargain contracts' are allowed on the KLSE. 9Rule 6, Brokerage, 'Rules For Trading By Member Firms And Member Companies,' The Knala Lumpur Stock Exchange, pp. 72-73. ~~ Rule I l, Section (4), p. 95. t qbid., Rule 14, Section (8), p. 98. t2The Singapore Stock Exchange Journal, Vol. 7, No. 4 (April, 1979) p. 67. laThe Kuala Lumpur Stocg Exchange Gazette, Vol. 7, No. 3 (March, 1979) pp. 30-32. t4Rule 7; Section (6), 'Rules for Trading', op. cit., p. 45. t51977 Companies llandbook of the Stock E'xchange of Singapore, Ltd., Vol. XI (Stock" Exchange of Singapore Ltd., Singapore, June 30, 1977) pp. vii-x{. 16Annual Companies llandbook, Vol. IV, The Kuala Lumpur Stock Exchange (Kuala Lumpur, 1978) table of contents. tTThe Singapore Stock Exchange Journal, Vol. 7, No. 2, February 1979, p. 26. Exchange rates for 1978: S Sl =0.4343 SU.S.; M $1 =0.4432 SU.S. 9 laThe Kuala Lumpur Stock Exchange Gazette, Vol. 7, No. 2, Feb., 1979, p. 57.

M.M. Ltntrem'e. The Kuala Lumpur aml Singapore stock markets

435

Debentures, preferred stocks, bonds and government securities also trade on both exchanges, t9 In 1977, SES instituted the first organized options trading market in Asia. 2~

2.2. Sample data selection

In selecting sample firms the primary factor considered was homogeneity of both market sector and trading activity. For the SES the industrial sector comprises nearly 70~ of the total paid-in capital and 50~ of the total number of listed shares. 21 In the KLSE the industrial sector embodies over 50~ of the paid-in capital and over 50~ of the total number of listed shares. 22 On both exchanges industrials account for nearly 60~ of total trading turnover measured in terms of either number of shares or market value. 23 The relative importance of the industrial sector in both exchanges, therefore, dictated the use of only industrials in the two s.'imples of stocks generated for this study.24 In order to establish samples containing stocks with trading activity levels as homogeneous as possible, the most actively traded industrial stocks from both exchanges were sought. The desired samples would have contained only stocks that had at least one trade every trading day in order to obtain a number of series of closing prices of uniform length. The first attempt to discern consistently traded stocks by ranking them by number of shares traded over the period June 1977 to August 1978 failed. This is to say, stocks with the highest trading volumes arc not necessarily stocks that are consistently traded every day or nearly every day. Therefore, with the assistance of experienced staff of the two exchanges, lists of firms were drawn up - 24 from the SES and 16 from the KLSE - of the most consistently traded industrial firms. In addition to the activity criterion preference was given to stocks listed on the exchanges during the entire period studied. 2s Data for this study is composed of individual stock price observations from the KLSE commencing June 1, 1973 through December 31, 1978, and from the SES commencing January 1, 1973, to February 12, 1979.26 This
t~Faet Book 78, op. cit., p. 21; Listing Manual, The Kuala Lumpur Stock Exchange (Kuala
Lumpur) p. I I.

2~ Book 78., op. cir., p. 16. "-tFact Book 78, op. cit., p. 21. Z2The Kuala Lump,tr Stock Exchange Gazette, Vol. 7, No. 2, Feb., 1979, pp. 62-63. 231bid., p. 57; The Singapore Stock Exchange Journal, Vol. 7, No. 2, Feb., 1979, p. 25.
2~Concern over possible 'special case" reasons for lack of efficiency in commodity stocks, i.e., rubbers or tins, also dictated the elimination of these stocks from the samples. 25Suspensions did occur in a small number of firms used in the samples and two firms v,'ere not listed on the KLSE until several months after June 1973. Z6During the period January 1, 1973 to June 3, 1973 the two exchanges still were consolidated into one exchange.

436

M.M. Laurence, The Kmda Lumpur and Singupore stock markets

yielded 1382 trading days on the KLSE and 1525 trading days on the SES. Observations are last transaction (closing) prices on those days when a transaction occurred. Table I lists each firm selected together with the number of transaction days in the period studied.
Table I Sample stocks and number of transaction days, No. of transaction days

Stock no.

Name of stock

Kuala Lumpur Stock Exchange (1382 trading days)

I 2 3 4 5 6 7 8 9 10 I1 12 13 14 15 16 Sime Darby ttaw Par General Lumber Sire Lim Genting Inchcape Pan Electric Ben & Co. Boris Taiping Textiles Wearne Bros. Magnum Tan Chong Cold Storage North Borneo Timber Esso Ordinaries 1368 1062 1309 ! 139 1358 1287 1359 1095 ! 154 1136 1240 1354 1155 1910 608 975

Stock Exchange qf Singapore (1525 trading days)

I 2 3 4 5 6 7 8 9 l0 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Haw Par Cold Storage Sembawang Ship Wearne Bros. Pan Electric Malayawata Cycle & Carriage Inchcape Harimau Metro Boris Sime Darby Genting General Lumber National Iron Central Sugar Malayan Flour Straits Steamship Fraser & Neave F.E. Levingston Leong Huat Prima Perak Carbide Tractors Malaysia ll71 1474 1310 1424 1518 1171 1465 1521 1362 1039 1183 1516 1417 1330 1305 1220 823 1086 1421 1146 1087 93 l 788 1040

M.M. Laurence, The Kuala Lumpur aml Singapore .stock markets

437

Of the 40 KLSE and SES stocks in the sample none traded every trading day during tile periods observed in this study. Only six stocks, three from each sample, traded over 98% of the total possible trading days. The least frequently traded KLSE stock traded only 608 days or about 44% of the total trading days while the least frequently traded SES sample stock traded 788 days or about 52% of the total trading days. Therefore, the data consists of 40 chronological price series of differing lengths and differing trading gaps. Any trading days in which there was no trading in a stock are simply omitted from its sequence. Before using the data for statistical tests, they were transformed and screened for large errors in the following manner: First they were adjusted for cash and stock dividends, splits, and rights issues; then log price differences were calculated in a manner consistent with prior random walk tests; e.g. l o g P t - l o g P t _ t, following Fama (1965), where Pt includes the value of cash dividends or rights as well as the observed price adjusted for stock dividends or splits. 27 From these differences means and standard deviations were calculated for each stock. Any observations greater than three standard deviations from the mean were flagged for !nvestigation~ Adjustments for cash dividends and stock dividends also are consistent with prior tests. 2s Rights issue adjustment assumed the value of a right,
R=(P,-P,)/(n+

I),

(1)

where Pt = closing price on last trading day before ex-rights day, P, = subscription price, and n = number of rights required to buy one new share.

3. Tests of dependence and distributional statistics

3.1. R a n d o m walk tests - Serial correlations arid rults

Serial correlations and runs tests are commonly used to determine whether there are dependencies in successive values of log price differences. Because these tests are well known, very little attention will be given to discussing them. The reader is directed to the references for technical details. 27Logarithms of price differenceshave been used in past random walk tests because firstly, there is evidence to suggest that variance in price changes is a function of price level, and, secondly, because log P~-P~_ t is approximately the rate of return from continuous compounding over the time period t - 1 to t. 28Fama (1965, p. 46). The adjustment for cash dividends used the full pre-tax value awarded to shareholders.

43g

M.M. Laurence, The Kuala Lumpur and Singapore stock markets

3.2. Serial correlations

This test is simply a computation of the correlation coefficients between price changes lagged 1, 2, 3, etc., time periods. [See Kendall (1948, p. 412.)-I Serial correlation tests were made on the 40KLSE and SES stocks' log price differences between consecutive transaction days (differencing interval 1) for lags 1-30. Results for lags !, 2, 3, 5 and 10 are shown in table 2. While for lag 1 the serial correlation coefficients are generally positive, ten out of 40, or one-quarter, are negative, However, of the ten negative values only two are statistically significant at better than the 5 ~ level; and both of these are from the SES sample. Of the 40 serial correlation coefficients calculated for lag I, only 16 are non-significant. In the SES sample 13 of the 24 stocks have serial correlation values for lag 1 significant at lower than the 1~ level. In addition six other stocks' serial correlation values are significant at the 5~ level. The KLSE sample contains five out of 16 stocks with serial correlation coefficients for lag ! significant at lower than 5~ level. (Two of the five are significant at the 1'~ levcl.) The largest coefficient in absolute value is 0.185; while the mean absolute serial correlation for the KLSE and SES samples, respectively, is 0.041 and 0.078. For lag 2 nearly all serial correlation coefficients are negative (31 of 4 0 ) . Eight are statistically significant at at least the 5 ~ level. While the absolute values tend to become smaller as the lag increases, no distinct patterns emerge from serial correlation coefficients for lags greater than two. Considerable fluctuation in signs and magnitudes occur across the complete range of lags. 29

3.3. Rims tests

A run is defined as a price change sequence of the same sign, e.g., + + + --00+would constitute four runs where ' + ' represents a price increase, ' - ' a price decrease and '0' no change. Assuming price change independence, the total expected number of runs of all three types, M, is calculated by

M=

N(N+I)-

~ n
i=1

N,

(2)

where N = t o t a i number of price changes and hi=total number of price -'gSerial correlation coefficientsfor differencingintervals greater than one were not calculated as prior studies indicated that they were unlikelyto yield significantinformation.

M.M. Laurence, The Kuala Lumpur and Si gapore stock markets

439

Table 2 S e r i a l c o r r e l a t i o n c o e f f i c i e n t s { d i f f e r e n c i n g i n t e r v a l I, l a g s 1-10). Lags Firm I 2 3 5 lO

Kuala Lumpur Stock Exchange

I 2 3 4 5 6 7 8 9
I0

II 12 13 14 15 16

0.008 0 . 0 6 0 ~' -0.006 0.027 0.041 0.014 - 0.008 0.033 0.031 - 0,000 0.0714 0,044 0,0584 0.04 1 0.107 b 0.109 b

- 0.048 0.023 -0.019 -0.114 b - 0.030 0.018 - 0.044 - 0.097 ~' - 0.065 ~ - 0.038 - 0.026 -0.115 b - 0.022 0.0644 -0.022 0.036

0.081 b 0.089 b 0.016 0.028 - 0.004 0.042 0.021 0,059 ~ 0.032 - 0.007 0.029 0.006 - 0.058 ~ 0.054 -0.059 -0.001

0.0554 0.015 0.041 0.0604 0.034 0.018 0.013 0.003 0.034 0.027 0.057 ~ 0.004 0.020 0.005 -0.013 -0.021

0.062 ~ 0.036 0.010 0.003 0.049 0.000 0.0738 0.005 0.002 0.003 0.034 0.047 0.023 - 0.006 0.018 0.048

Stock Exchange of Singapore

I 2 3 4 5 6 7 8 9 I0 II 12
13

--

0.062 ~ 0.095 b 0.071 u 0.185 u 0,077 b 0.080 h 0.136 b 0.0898 0.018 0.097 b 0.000 0.062 ~
0.066 ~

----

0.026 0.032 0.073 b 0.046 0.045 0.009 0.013 0.053 ~ 0.028 0.023 0.021 0.012

0.085 b 0.086 b - 0.003 0.046 0.002 - 0.008 0.059 ~ 0.062 ~ 0.056 a 0.063 ~ 0.003 0.049
0.016

0.014 0.014 0.015 0.024 13.141 b 0.016 0.022 0.036 0.006 0.003 0.033 0.003

-- 0.010

-- 0.016

14 15 16 17 18 19 20 21 22 23 24

-- 0.005 0.080 b 0.091 b -- 0 . 0 5 4 O. 104 b -- 0 . 0 2 3 0.059 ~ 0.129 u 0.0734 0.081" 0.145 b 4Reject H o, p = 0 b R e j e c t Ho, p = 0

0.006 -- 0.023 --0.034 -- 0 . 0 2 6 -- 0 . 0 1 9 -- 0.043 -- 0.038 0.052 -- 0.003 -- 0 . 0 9 2 b -- 0 . 0 2 0

-- 0 . 0 4 0 0.059 J 0.016 0.080 J 0.0644 0.064 ~ 0.053 0.029 0.024 0.009 0.087 b

0.017 0.005 --0.014 -- 0 . 0 4 9 0.040 0.040 -- 0 . 0 8 0 b 0.015 0.067 ~ 0.013 0.026

0.033 0.006 0.055 ~ 0.044 0.053 ~ - 0.002 - 0.072 b 0.051 a 0,047 0.0754 -- 0.0624 0,062 ~ 0.000 0.009 0.008 0.015 0.033 0.019 0.027 0.018 -- 0 . 0 0 4 0.001 0.073 a 0.055

a t 5~o l e v e l o f s i g n i f i c a n c e . a t I~/o l e v e l o f s i g n i f i c a n c e .

440

AI.,%I. Laurence. The Kuala Lumpur and Singapore .stock markets

changes of each sign. The standard error of M is

S , = Li =,
9

E ,t, E

Li = l
N2(N -

-2N E
!)

i= t

(3)

Fortt, nately for large N, the sampling distribution of /%1 is approximately normal. [See Wallis and Roberts (1956, pp. 569-572).-I Tests of statistical significance are, therefore, straightforward comparisons of the number of observed runs versus the number of expected runs using a standardized variable,
K = (d - M + 89 M,

(4)

where J = the total observed number of runs of all types and tile sign of the discontinuity adjustment is plus if J < 3,1 and minus otherwise. Following Fama (1965) runs tests were calculated for the 40 KLSE and SES stocks for differencing intervals 1, 2, 3, 5, 7 and 10, i.e., for price changes in each stock occurring between 1, 2, 3, 5, 7 and 10 sequential trading days on which there actually was a trade in the stock. The results for differencing interval I arc reported in table 3. All but two stocks, one in the KLSE and one in the SES, have negative standardized variables indicating that 38 of 40 firms have less actual than expected runs. However, the significance levels of the standardized variables are mixed. Only 23 of the 40 stocks have standardized variables as small as - 2 . In the KLSE sample three stocks have standardized variables smaller than - 3 and an additional three are smaller than - 2 ; while for the SES sample ten stocks have standardized variables smaller than - 3 and an additional seven are smaller than - 2 . (Five stocks have standardized variables smaller than - 4 , and one is smaller than - 6 . ) The mean absolute standardized variable for the KLSE sample is 1.72 while the same statistic for the SES sample is 2.64. For differencing intervals greater than one, most standardized variables are smaller than two in absolute value and of varying signs. 3~ The mean absolute variables tend to decrease as differencing intervals increase reflecting share price adjustment predicted by efficient markets theory. The high proportion of positive serial correlation coefficients found earlier agrees with the nearly total negative standardized variables reported here. Negative standardized variables indicate fewer observed than expected runs which are also anticipated by the positive serial correlation coefficients. S~ for differencingintervals greater than one are not tabulated here but are available upon request from the author.

M.M. L,:urence. Tile Kuala l.umpur and Singapore stock marketx

441

Table 3 Stock no. KLSE Total no. of runs (JJ Expected no. of runs (M) Standard error ( S . ) Standard variable (K)

Kt.:h: Lumpur Stock Exchunge

I 2 3 4 5 6 7 8 9 I0 II 12 13 14 15 16 823 635 773 685 828 748 813 660 706 716 696 781 669 545 348 598 844.580 640.585 771.705 720.394 833.027 775.515 814.685 668.940 718.044 745.201 770.763 838.663 711.518 567.271 391.500 640.294 17.195 15.142 16.732 15.675 17.162 16.579 17.125 15.260 15.711 15.753 16.355 17.116 15.820 13.988 11.470 14.615 - t.226 -0.336 -0.048 -2.226 -0.264 -I.629 -0.069 -0.553 -0.735 -1.822 -4.541 -3.340 -2.656 --1.556 -3.749 -2.860

Stock Exchange of Singapore

Stock no. SES I 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 698 393 833 803 890 653 820 854. 855 624 729 889 834 768 794 723 231 638 836 650 643 545 470 577 709.121 441.579 861.321 875.131 898.022 715.332 904.455 908.833 849.633 659.335 764.785 927.213 $73.812 790.926 844.811 756.455 254.324 704.071 917.728 707.173 679.308 599.037 473.076 674.525 15.89 12.52 16.93 17.54 18.15 15.90 17.82 18.11 17.15 15.00 15.94 18.06 17.52 16.84 16.86 16.21 9.42 15.36 17.58 1534 15.20 14.21 12.93 15.00 -0.668 --3.839 --I.643 -4.084 --0.414 --3.888 --4.712 --3.001 --0.284 --2.323 -1.085 -2.088 -2.244 -1.331 -2.984 -2.033 -2.423 -4.270 -4.620 -3.601 -2.026 -3.766 -0.199 -6.470

442

M.M. Laurem'e, The Kuala Lnmpur am/Sit gapore .st,wk market.~

S o m e consistency exists between the statistically significant s t a n d a r d i z e d wlriables and serial c o r r e l a t i o n coefficients. In the K L S E sample, of seven possible pairs of significant statistics there are four actual m a t c h c d pairs while in the SES s a m p l e there are 15 actual m a t c h e d pairs of a possible 21 pairs. Tables 4 a n d 5 s u m m a r i z e the results of these two statistical tests on the SES a n d K L S E a n d a d d F a m a ' s N Y S E findings as a b e n c h m a r k . T o g e t h e r the results suggest o n l y slightly greater d e v i a t i o n from perfect w e a k - f o r m efficiency on the two smaller exchanges. W h e t h e r the differences in weakform efficiency are statistically significant c a n n o t be d e t e r m i n e d . Table 4 Serial correlation comparisons {differencing interval I, lag I). Reject Ho, p=O: At 5'!,, level
,~hda)'.,6a

At I". level

Signs

Mean absolute serial correlation coefficient Reference

16 Stocks (KLSE)
U.S.

5/16

2/16

+ 13/16

0.041

Table 2

30 Stocks (NYSEI
Singal,ore

11/30

No pattern

0.048

l"ama 11965} Table 2

24 Stocks (SESI

19/24

13/24

+ 17/24

0.078

Table 5 Runs test comparisons (differencing interval I, lag I}. Standardized variables <- 2
U.S.

<- 3

Positive

Minimum value

MASV"

Reference

30 Stocks (NYSE)
Malaysia

8/30

4/30

-4.23

1.53

Fama (1965)

16 Stocks (KLSE)
Singapore

6,'16

3/16

1/16

-4.54

1.73

Table 3

24 Stocks 9(SES)

17/24

10/24

1/24

-6.47

2.67

Table 3

~Mean absolute standard variable,

.ll.M. Laurence, The Kilahl Llonptlr and Singapore stock markets 3.4. Di.s'trihlttional statistics

443

In o r d e r to establish a basis for describing the empirical d i s t r i b u t i o n s of stock price changes, m e a n s a n d s t a n d a r d d e v i a t i o n s of the empirical distrib u t i o n s of log price differences, differencing interval 1, were calculated. O f the K L S E stocks, 1 ! have negative means; a n d 15 of the 24 SES stocks also have negative m e a n s i n d i c a t i n g s o m e possible d o w n w a r d drift in prices. All of the m e a n s , however, are close to zero, i.e., n o n e is statistically significantly different from zero at the 570 level. T a b l e 6 illustrates a c o m p a r i s o n of the a v e r a g e empirical d i s t r i b u t i o n s for the 40 K LSE a n d SES s t o c k s with the n o r m a l d i s t r i b u t i o n and the average e m p i r i c a l d i s t r i b u t i o n found by F a m a (1965). Table 6 Average empirical distributions.
.r S.D. .~___I S.D. .~+I ~ , S.D. .'~ 4- 2 S.D. .~+2~ S.D. .~+3 S.D. .'~+4 S.D. .'~+5 S.D.

Normal Fama. U.S. KLSE, 16 SES. 24

0.3830 0.4667 0.5609 0.5814

0.6826 0.7459 0.7967 0.8085

0.8664 0.8847 0.8995 (I.9056

0.9545 0.9478 0.9462 0.9487

0.9876 0.9756 0.9710 0.9691

0.9973 0.9886 0.9833 0.9820

0.99994 0.9970 0.9943 0.9926

0.9999 0.9988 0.9970 0.9963

Each cell in the table represents the c u m u l a t i v e average p r o p o r t i o n of o b s e r v e d log price differences falling into the p a r t i c u l a r s t a n d a r d deviation interval specified for the row s a m p l e indicated. F r o m o n e - h a l f s t a n d a r d d e v i a t i o n u p w a r d s to one a n d o n e - h a l f s t a n d a r d d e v i a t i o n s a larger p r o p o r tion o f o b s e r v a t i o n s is found in SES a n d K L S E samples. At the two s t a n d a r d d e v i a t i o n level the p r o p o r t i o n of o b s e r v a t i o n s is a p p r o x i m a t e l y the s a m e in all cases. T h e n a shift takes place from 289 up to 5 s t a n d a r d d e v i a t i o n s so that the K L S E a n d SES tend to have s m a l l e r p r o p o r t i o n s of o b s e r v a t i o n s in those intervals. This indicates relatively 'fat' tails c o m b i n e d with peakedness, o r leptokurtosis. 31 This m a y m e a n the log price differences in these m a r k e t s have infinite variance, a n d c a u t i o n s h o u l d be exercised in using s t a n d a r d statistical m e t h o d o l o g y to m a k e inferences a b o u t w e a k - f o r m efficiency. 32 3~The usual measure of kurtosis (peakedness), a,,,is the mean of fourth powers of the deviations from the mean divided by the fourth power of the standard deviation. It is customary to call a distribution leptokurtic if its value of a,>3. See Freund and Williams (1969, pp. 107108). For the 40 firms in the two samples only one firm had a.t<3 and that was a borderline case of a.~= 2.94. S-'Researchers are also interested in the distribution of share price changes over time because one part of the random walk model specifies identical distribution of share price changes; however, because conclusive tests to prove identical distribution are difficult to design and because the information is less interesting economically, most studies are only concerned with describing the distribution of the sample average as in this paper.

444

M.AI. Laurem'e, The Kuala Lumpur and Singapore stock market.~

4. Conclusions
Serial correlation coefficients, runs tests and distributional statistics have provided evidence of the character of successive daily price changes for some of the most actively traded stocks in the industria! sectors of the K L S E and SES - two of the world's smaller stock markets. The two independence tests manifest mixed behavior. Some sample stocks exhibit r a n d o m walk behavior while others - particularly m a n y of those from the SES - ' a p p e a r to deviate from a r a n d o m walk. This finding is consistent with Granger's (1975, p. 11) c o m m e n t that the r a n d o m walk hypothesis is '... clearly only an "average" kind of law, and m a y not hold true for all securities at all times'. Even though statistical measures of weak-form efficiency of the K L S E and SES indicate some small deviations from perfect independence, the question of whether the deviations are large enough to exploit profitably remains open and to be answered by future filter studies. Average empirical distributions o f successive price changes over time on the K L S E and SES resemble reported findings in other markets, i.e., leptokurtic and distinctly non-normal, This means that statistical tests of significance based on the normality assumption m a y be inappropriate. Weak-form efficiency characteristics of the SES and K L S E parallel closely those found in the NYSE. This suggests that differences in relevant information sets m a y be more apparent than real, i.e., in small markets priceforming information m a y be disseminated very rapidly without sophisticated c o m m u n i c a t i o n s technology, hordes of analysts, large numbers of business journals and intensive market regulation.

References
Ang, J.S. and R.A. Pohlman, 1978, A note on the price behavior of Far Eastern stocks, Journal of International Business Studies, no. 1, 103-107. Conrad, K. and D.J. Jfittner, 1973, Recent behavior of stock market prices in Germany and the random walk hypothesis, Kyklos, no. 26, 576-599. D'Ambrosio, Charles A., 1980, Random walk and the stock exchange of Singapore, The Financial Review 15, no. 2, 1-9. Dryden, M.H., 1970, A statistical study of U,K. share prices, Scottish Journal of Political Economy 17, 369-389. Fama, E., 1965, The behavior of stock market prices, Journal or Business, 34-104. Fama, E.F., 1970, Efficient capital markets: A review of theory and empirical work, The Journal of Finance 25, no. 2, 383-417. Freund, J.E. and F.J. Williams, 1969, Modern business statistics (Prentice-Hall, Englewood Cliffs, NJ). Granger, C.W.J., 1975, A survey of empirical sit,dies on capital markets, in: E,J. Elton and M.J. Gruber, eds., Internatiomd capital markets (North-Holland, Amsterdam) 3-36. }long, H., 1978a, Predictability ol" price trends on stock exchanges: A study of some Far Eastern countries, Review or Economics and Statistics 60, no, 4, 619-621. Hong, H., 1978b, The random walk in stock markets: Theory and evidence, Securities Industry Review 4, no. 1, 25-29. Jennergren, L.P. and P.E. Korsvold, 1975, The non-random character of Norwegian and Swedish stock market prices, in: E.J. Elton and M.J. Gruber, eds., International capital markets (North-Holland, Amsterdam) 37-67.

M.M. Laurence, The K~lala LItmp,r aml Singapore stock markets

445

Kendall, M.G., 1948, The advanced theory of statistics, Vol. 11, second ed. (Griffin, London). Kemp, A.G. and G.C. Reid, 1971, The random walk hypothesis and the recent behavior of equity prices in Britain, Economica 38, 28-51. Lim, T.L., 1980, Private correspondence, November 24. Praetz, P.D., 1969, Australian share prices and the random walk hypothesis, Australian Journal of Statistics II, 123. Solnik, B.H., 1973, Note on the validity of the random walk for European stock prices, Journal of Finance 28, 1151-1159. Teng, Tan Pheng, 1978, The development of the securities industry, Securities Industry Review 4, no. I, April, 6-11. Wallis, W.A. and H.V. Roberts, 1956, Statistics: A new approach (Free Press, Glencoe, IL).