THE INFORMATIONAL EFFICIENCY OF STOCK MARKET: AN UNRESTRICTED ERROR CORRECTION MODEL

Abstract

The empirical literature on stock market mainly focused on the relationship between stock return with the scale variable, i.e. output, opportunity cost variables, i.e. interest rate and inflation rate as well as external variable, i.e. exchange rate, and less studies are found to emphasize on the role of informational efficiency of economic uncertainty in the stock market. Therefore, this paper is aimed to investigate the informational efficiency of economic uncertainty in the stock market together with other economic indicators, namely output, interest rate and exchange rate. The informational efficiency in the study is determined by examining the cointegration between stock return and the observed variables. The analysis of the study is conducted by using the Unrestricted Error Correction Model, a bound test approach. The study is conducted over the period of 1994Q1 to 2016Q2 with the samples of three G-7 countries and five ASEAN countries, namely Japan, United Kingdom, United States, Indonesia, Malaysia, Philippines, Singapore and Thailand. The results of the study find that long run cointegration exist between stock return and the observed indicators in the selected countries. Thus, this study supports that stock market is informational inefficient and stock prices do not fully incorporate all past and public information. Therefore, the movements of the economic indicators observed in the study can provide information to the investors and policy makers in their decision making related to stock market.