Testing the weak form of efficient market hypothesis for socially responsible and Shariah indexes in the USA
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 12 July 2021
Issue publication date: 6 August 2021
Abstract
Purpose
By testing the weak form of efficient market hypothesis (EMH) this study aims to forecast the short-term stock prices of the US Dow and Jones environmental socially responsible index (SRI) and Shariah compliance index (SCI).
Design/methodology/approach
This study checks the validity of the weak form of EMH for both SCI and SRI prices by using different parametric and non-parametric tests, i.e. augmented Dickey-Fuller test, Philip-Perron test, runs test and variance ratio test. If the EMH is invalid, the research further forecasts short-term stock prices by applying autoregressive integrated moving average (ARIMA) model using daily price data from 2010 to 2018.
Findings
The research confirms that a weak form of EMH is not valid in the US SRI and SCI. The historical data can predict short-term future price movements by using technical ARIMA model.
Research limitations/implications
This study provides better guidance to risk-averse national and international investors to earn higher returns in the US SRI and SCI. This study can be extended to test the EMH of Islamic equity in the Middle East and North Africa region and other top Islamic indexes in the world.
Originality/value
This study is a new addition to the existing literature of equity investment and price forecasting by comparing and investigating the market efficiency of two interrelated US SRI and SCI.
Keywords
Acknowledgements
The authors are thankful to Ms. Maryam Khan Sher for her valuable contributions and editorial help, especially during the review process. The authors are grateful to the Editor in Chief, Associate Editor and the anonymous referees for their valuable comments which we believe have further improved the quality of the paper. The authors would also like to take this opportunity to acknowledge the technical support extended by the Department of Management Sciences, COMSATS University Islamabad, Wah Campus, Pakistan and the Research School of Southeast Asian Studies, Xiamen University, Fujian, China.
Citation
Khan, A., Khan, M.Y., Khan, A.Q., Khan, M.J. and Rahman, Z.U. (2021), "Testing the weak form of efficient market hypothesis for socially responsible and Shariah indexes in the USA", Journal of Islamic Accounting and Business Research, Vol. 12 No. 5, pp. 625-645. https://doi.org/10.1108/JIABR-02-2020-0055
Publisher
:Emerald Publishing Limited
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