A test of market efficiency using ARCH models.

The purpose of this thesis is to examine the efficient market hypothesis (EMH) employing an ARCH model proposed by Engle (1982). The relations of the US stock market and other five major stock markets, i.e., the Canadian, French, German, Japanese, and UK markets are investigated. The time series used in this study are monthly stock price and dividend indices for the above six stock markets. The data cover the period from January 1970 to March 1991. In this study I utilize the ARCH model which appears to be very powerful in modeling conditional heteroscedasticity of stock prices. My test results provide unambiguous evidence of significant ARCH effects existing between the six national stock markets. Therefore, this study demonstrates the existence of market inefficiency for these national markets.