Market Efficiency: The Case of Palestine Exchange (PEX)

The study aims to empirically examine the weak-form market efficiency of Palestine Exchange (PEX) as a developing financial market in the Middle East region. The random walk theory is thoroughly investigated to test whether past indices returns can predict future returns. Observations of past returns of the seven indices of the Palestinian stock market are the key input for the empirical data analysis. The study employs the serial correlation and the Augmented Dickey-Fuller test (ADF) as parametric tests. The runs test is also used as a non-parametric test. Results of the parametric tests are consistent with the alternative hypothesis that the stock market is inefficient at the weak-form level as the indices exhibited autocorrelation and stationary behavior. Meanwhile, results of the runs test also supports the inefficiency of the market as the major index found to be following a pattern rather than a random walk. Finally, result of the regression analysis of stock indices doesn’t support the random walk model.