An empirical study on the efficiency of European stock markets

Abstract

The Efficient Market Hypothesis (EMH), according to which stock prices strictly absorb and reflect all relevant information, has been the subject of an excessive number of studies, due to the importance of the particular theory in the field of Finance. Still, the majority of these studies are testing a limited number of markets, such as the market of a particular index or stock. Additionally, often the data consist only of daily observations and returns, thus failing to provide information considering a longer time horizon. Consequently, while there is a vast amount of quality research on testing the EMH, the resulting inference cannot be easily generalized to similar and/or alternative cases.The objective of this thesis is to investigate whether and to what extent the weak form of EMH holds in the case of European stock markets, and present the resulting inference in a unified framework. To implement the empirical work, 17 of the most important European stock market indices are examined over a time period of 5 years. Better insight into the issue is provided by analyzing daily time series, weekly time series and monthly time series of each index. A novel joint hypothesis test is introduced, composed of three different distinct hypothesis tests, in order to provide rigorous inference.