Efficiency Puzzle of Stock and Mutual Fund Markets (A Comprehensive Evaluation of the Weak Form in Egypt)

This study examines the weak-form efficiency of Egypt’s stock and mutual fund markets, evaluating whether historical price movements influence future returns. The Efficient Market Hypothesis (EMH) posits that in weak-form efficient markets, stock prices fully reflect past information, making it impossible for investors to earn abnormal returns through technical analysis. To test this hypothesis, the study employs four statistical methodologies: the Durbin-Watson test for serial correlation, the Runs test for randomness, the KPSS unit root test for stationarity, and the Variance Ratio test to assess the random walk hypothesis. The research utilizes monthly return data spanning from January 2003 to December 2022, covering both the Egyptian stock market (EGX30 index) and a sample of Egyptian mutual funds.
The empirical findings indicate mixed results regarding market efficiency. The Durbin-Watson test and KPSS unit root test reject weak-form efficiency in both markets, as return series exhibit stationarity and significant serial correlation, suggesting price predictability. The Runs test also contradicts the random walk hypothesis, reinforcing evidence of inefficiency. However, the Variance Ratio test provides partial support for weak-form efficiency in the Egyptian mutual fund market under the heteroskedastic assumption, while rejecting it for all other cases. These results highlight structural inefficiencies in Egypt’s financial markets, indicating that investors may be able to exploit historical price patterns for abnormal returns.
The findings align with previous research on emerging markets, where weak-form inefficiency is often observed due to factors such as regulatory shortcomings, information asymmetry, and market manipulation. As Egypt continues its economic reforms, improving market efficiency remains crucial for attracting foreign investment and fostering financial stability. The study’s results offer valuable insights for policymakers, investors, and financial regulators, emphasizing the need for enhanced transparency and regulatory measures to promote efficient market functioning.