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Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul

Finance Department, Baku Engineering University, Baku AZ0101, Azerbaijan
Int. J. Financial Stud. 2019, 7(2), 27; https://doi.org/10.3390/ijfs7020027
Received: 21 March 2019 / Revised: 10 May 2019 / Accepted: 13 May 2019 / Published: 4 June 2019
Market efficiency has been analyzed through many studies using different linear methods. However, studies on financial econometrics reveal that financial time series exhibit nonlinear patterns because of various reasons. This paper examines market efficiency at Borsa Istanbul using a smooth transition autoregressive (STAR) type nonlinear model. I develop nonlinear ARCH and STAR models, a linear AR model and random walk model for 10 years’ weekly data and then out-of-sample forecast next 12 weeks’ return. Comparing forecast performance powers, I find that the STAR model outperforms random walk, that is Borsa Istanbul returns are predictable at the given period. The results show that the shareholders may earn abnormal return and identify the direction of the return change for the next week with at least 66% accuracy. Contrary to the linear level studies, these findings show that the Borsa Istanbul is not weak form efficient at nonlinear level within the studied period. View Full-Text
Keywords: market efficiency; nonlinear models; STAR; return prediction market efficiency; nonlinear models; STAR; return prediction
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Aliyev, F. Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul. Int. J. Financial Stud. 2019, 7, 27.

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