Osamah M. Al-Khazali

A New Variance Ratio Test of Random Walk in Emerging Markets: A Revisit

Using a nonparametric variance ratio (VR) test, we revisit the empirical validity of the random walk hypothesis in eight emerging markets in the Middle East and North Africa (MENA). After correcting for measurement biases caused by thin and infrequent trading prevalent in nascent and small stock markets, we cannot reject the random walk hypothesis for the MENA markets. We conclude that a nonparametric VR test is appropriate for emerging stock markets, and argue that our findings can reconcile previously contradictory results regarding the efficiency of MENA markets.

Empirical testing of the loss provisions of banks in the GCC region

Purpose - The purpose of this study is to examine the factors which affect loss provision for loans and investment in Murabaha, Musharka, and Mudarabah for banks in the Gulf Cooperation Council (GCC) region. The effect of prior period earnings, legal and statutory reserves, size of the bank, level of debt, and loan and investment to deposit ratio on the loss provisions of banks are examined for the period 2000-2003. Design/methodology/approach - To test the factors that explain the loan loss provision and to test the income smoothing hypothesis, debt to equity hypothesis, and reserve hypothesis, a single stage regression model was developed and tested. Findings - The results indicate that when return on assets (ROA) before tax and loss provisions for the current year is higher than the prior year ROA and the actual capital reserve is below the legal required reserve, then management is expected to increase loss provisions for the current year. This result is robust for all the years of this study. Originality/value - While prior research has examined the issue of the loan loss provision in USA, Japan, and Europe, no research has examined the issue of the loss provisions in the GCC region. This study demonstrates that the income smoothing hypothesis is relevant across different regulatory requirements, economic conditions, and different accounting standards. Managers of banks in the GCC region use the loss provision, among other things, to smooth earnings to achieve certain objectives.

Intra-regional integration of the GCC stock markets: the role of market liberalization

The study examines empirically whether, and to what extent, equity markets in the Gulf Cooperation Council (GCC) are integrated inter-regionally. According to the official Charter of the GCC, building stronger ties among financial and capital markets of member states is a chief objective of the GCC. The results for the equity markets of Saudi Arabia, Kuwait, Bahrain and Oman suggest that these markets share a common stochastic trend that binds them together over the long-run. The results from alternative tests also indicate that measures taken since 1997 to liberalize the capital markets in the Gulf region are at least partly responsible for linking the Gulf markets. At least two implications emerge from these results. First, portfolio diversifications in the context of the Gulf region should bring little or no benefits to investors with long-term horizons, although short-term gains remain a possibility. Second, further steps to liberalize capital markets in the region appear an appropriate strategy for achieving a more integrated capital markets in the Gulf.

The impact of thin trading on day-of-the-week effect: Evidence from the United Arab Emirates

Purpose - The purpose of this study is to examine the impact of thin trading on the day-of-the-week effect in the emerging equity markets of the United Arab Emirates (UAE). Researchers have stated that emerging markets are typically characterized by low liquidity, thin trading and possibly less well-informed investors with access to unreliable information and considerable volatility. It is well known that thin trading can affect the results of empirical studies on patterns of equity markets by introducing a serious bias into the results. Design/methodology/approach - This study applies a stochastic dominance approach to detect the day-of-the-week effect. The reason for utilizing this approach is that the parametric tests are not strictly appropriate for assets with non-normally distributed returns. In fact, stochastic dominance is a useful tool for making comparisons among distributions without relying on parametric assumptions. Findings - The findings indicate that there is day-of-the-week effect in published daily prices, while daily effect vanishes when data are corrected to remove any measurement bias arising from thin trading. The stochastic dominance results show that the day-of-the-week effect in the UAE equity markets is not present when we correct raw data for thin and infrequent trading. Originality/value - There has been no research in the literature testing the day-of-the-week effect on the emerging financial markets in the UAE. The study provides empirical evidence on their degree of market efficiency. If the day-of-the-week effect exists, this means that the Abu Dhabi Securities Markets and the Dubai Financial Markets are inefficient. These results will help investors to develop a good investment strategy

Does the January effect exist in high-yield bond market?

Abstract Previous studies show that January returns in high-yield bond (HYB) markets are usually large. While these results are ubiquitous, their validity depends on the robustness of statistical procedures used. Virtually every study of seasonal variation in HYB markets has used mean/variance analysis despite it being well documented that returns in HYB markets are nonnormally distributed. This study uses stochastic dominance comparisons to audit previous parametric tests of the January effect in HYB markets in the U.S. from 1926 to 1993. Results indicate that the January effect in HYB markets is robust and that previous findings are not an artifact deriving from violations of distributional assumptions.

A Market Efficiency Comparison of Islamic and Non-Islamic Stock Indices

ABSTRACT This article examines the martingale difference hypothesis (MDH) and the random walk hypothesis (RWH) for nine conventional and nine Islamic stock indices: Asia-Pacific, Canadian, Developed Country, Emerging, European, Global, Japanese, UK, and United States. It investigates whether Islamic stock indices are more, less, or as efficient as their conventional counterparts. We test four sub-periods of bullish and bearish stock markets, together with the financial meltdown and its recovery, over the period 1997–2012. We use the Escanciano and Lobato’s (2009) automatic portmanteau test (AQ) and Deo’s (2000) test for the MDH. We also apply the automatic variance ratio test (AVR) developed by Choi (1999) and Kim (2009) for the RWH. Over the period from 1997 to 2012, we find that three conventional indices (Europe, Japan, and UK) are efficient, but that none of the Islamic indices are efficient in these markets. During the recent financial crisis, our results indicate slightly more efficiency for the Islamic indices than their conventional counterparts. Our study finds that overall the conventional indices are more efficient than their Islamic counterparts. Nevertheless, during periods of general downturns the Islamic indices have shown the same level of efficiency as their counterparts. Furthermore, it appears that during the last two sub-periods under study, the Islamic indices have moved toward efficiency, displaying the same level of efficiency as their counterparts.

Does infrequent trading make a difference on stock market efficiency?: Evidence from the Gulf Cooperation Council (GCC) countries

Purpose - After adjusting for thin trading, this study seeks to examine the market efficiency for six emerging stock markets in the Gulf Cooperation Council (GCC) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Design/methodology/approach - This study uses the LOMAC single variance ratio (VR) test and the Wrights rank and sign VR tests to examine informational efficiency after correcting the data for thin trading that typically characterizes these indexes. Findings - As the observed indexes in thinly traded markets may not represent the true underlying index value, there is a systematic bias toward rejecting the efficient market hypothesis. The results of this study show that after removing the effect of infrequent trading the random walk hypothesis was not rejected in all GCC equity markets. Originality/value - To the best of the authors knowledge this is the first study that applies the Wrights rank and sign VR tests after adjusting for thin trading in GCC equity market.

The Saturday effect in emerging stock markets: a stochastic dominance approach

Purpose – The purpose of this paper is to empirically investigate the Saturday effect in three emerging stock markets (Bahrain, Kuwait, and Saudi Arabia) by taking into consideration the thin trading that is normal in such capital markets.Design/methodology/approach – The paper applies the stochastic dominance (SD) approach, which is not distribution‐dependent and can shed light on the utility and wealth implications of portfolio preferences by exploiting information in higher order moments, to investigate empirically the existence of the Saturday effect in the three Gulf stock markets.Findings – The findings indicate that the Saturday effect does not manifest itself in the three Gulf stock markets and that the SD results show that the Saturday effect in these markets is not present when raw data are corrected for thin and infrequent trading.Originality/value – This paper is believed to be the first to use SD approach to examine the Saturday effect.

The generalized Fisher hypothesis in the Asian markets

This paper investigates the generalized Fisher hypothesis for nine equity markets in the Asian countries. It states that the real rates of return on common stocks and the expected inflation rate are independent and that nominal stock returns vary in a one‐to‐one correspondence with the expected inflation rate. The regression results indicate that stock returns in general are negatively correlated to both expected and unexpected inflation, and that common stocks provide a poor hedge against inflation. However, the results of the VAR model indicate the lack of a unidirectional causality between stock returns and inflation. It also fails to find a consistent negative response neither of inflation to shocks in stock returns nor of stock returns to shocks in inflation in all countries. It appears that the generalized Fisher hypothesis in the Asian markets is as puzzling as in the developed markets.

Interactions between mortgage and other capital markets in the USA: has financial deregulation made a difference?

The degree of short- and long-term interreactions between the mortgage and other capital markets in the USA is explored. The study also investigates whether financial market deregulation impacts the underlying interrelations. Theory alone provides little practical guidance on both issues. The empirical results are derived from monthly data using multivariate models and numerous sensitivity tests. The results consistently support regulators’ common posture that the mortgage market is essentially localized over the long term. Nevertheless, the results do show that the mortgage market exhibits pronounced short-term interrelations with other capital markets, especially the long-term Treasury security market. Compelling evidence is also found that financial market deregulation had little impact on the degree of markets’ interrelations.