Middle Eastern stock markets: absolute, evolving and relative efficiency

The martingale hypothesis is tested for 11 Middle Eastern stock markets using three finite sample variance ratio tests. For comparative purposes, the same tests are applied to data obtained for the US. The tests are carried out with both observed returns and returns corrected for thin trading, so the effect of the thin trading correction is evident. A rolling window is used to track the changes in efficiency through time and rank markets by the relative efficiency. Overall, most markets experience successive periods of efficiency and inefficiency, which is consistent with the adaptive markets hypothesis. Predictability varies widely: the least predictable stock markets are those located in Turkey, Egypt and Israel; the most predictable are in Jordan, Lebanon and Saudi Arabia. When returns are corrected for thin trading, there is much less variation in relative efficiency.