Proceedings

FINANCIAL MARKET EFFICIENCY
AND PERSPECTIVES ON IFRS ADOPTION.
CASE STUDY FOR THE UNITED KINGDOM,
THE UNITED STATES OF AMERICA AND JAPAN
Ştefana DIMA (CRISTEA) 1
Vasile Goldis Western University of Arad, Romania
Bogdan DIMA & Otilia ŞĂRĂMĂT
West University of Timişoara, Romania
ABSTRACT
This paper examines the random walk behavior of three major capital markets, namely
United Kingdom, United States of America and Japan. Results are obtained for DJI, FTSE
100 and NIKKEI 225 indexes, over a time span from 1995 to 2010. Our analysis uses the so
called Lo-MacKinlay (1988) Variance Ratio Tests and some unit root tests in order to
estimate if the corresponding Hurst exponents of these indexes evolve as random walk
processes. The results suggest that the Hurst exponents for the prices series can not be
described as random walk processes. The unit root analysis suggest that overall, the trend
stationarity hypothesis can be rejected in the favor of unit root with drift processes. We are
viewing such outcome as an empirical proof for the difficulty of validating the weak form of
markets informational efficiency. However, we are considering that the intensification of
IFRS adoption can contribute to further improvement of this efficiency.
KEYWORDS: informational efficiency, random walk, IFRS adoption, financial market
INTRODUCTION
Efficiency of capital markets has important implications for the investors’ policy of
investment. In efficient markets, all fundamental information about the intrinsic value
of traded assets and information related to market characteristics should be reflected
in prices, without any distortions or omissions. So, prices of the assets will reflect
markets’ best estimate for the risk and expected return of the asset, taking into account
what is known about the asset at the time. Therefore, there will be no undervalued
assets offering higher than expected return or overvalued assets offering lower than
the expected return. All assets will be appropriately priced in the market offering
optimal reward to risk.
In general terms, market efficiency means that prices “fully reflect all the available
information” (Fama, 1970: 383). The accepted view was that when information arises,
the news spreads very quickly and is incorporated into the prices of securities without
delay. Thus, neither technical analysis, which is the study of past stock prices in an
1 Correspondence address: Ştefana DIMA (CRISTEA), Vasile Goldiş Western University of Arad,
Faculty of Economic Sciences, Address: 15, Mihai Eminescu St., Arad, Romania ; email:
stefana_cristea@yahoo.it
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