Malaysian finance sector weak-form efficiency: Heterogeneity, structural breaks, and cross-sectional dependence


  • Sook Ching Kok Faculty of Business, Economics and Accountancy, Universiti Malaysia Sabah, Malaysia
  • Qaiser Munir Faculty of Business, Economics and Accountancy, Universiti Malaysia Sabah, Malaysia


Market efficiency, Financial firms, Banks, Heterogeneity, Panel data, Structural breaks, Cross-sectional dependence


This study examines the weak-formefficientmarkethypothesis (EMH)for the Finance Sector inMalaysian Stock Exchange, by exploring and scrutinizing the firm-level efficiency over for the period from 1 st January 1997 to 31st December 2014. For this purpose, we apply panel nonlinear unit root test that accounts for heterogeneity, and panel stationarity test to allow for the presence of structural breaks and crosssectional dependence (CSD). The main findings of this study suggest the following: first, there is a strong CSD among the price series of finance stocks; second, unlike the traditional panel unit root tests that provide mixed-results, the panel stationarity test which incorporates structural breaks and CSD suggests that these series are characterized as random walk processes implying the Finance Sector is weak-form efficient. The finding of weak-form efficiency has salient implications in terms of capital allocation, stock price predictability, forecasting technique, and the impact of shocks to stock prices.



Download data is not yet available.


Andrews, D. W. K. (1991). Heteroskedasticity and autocorrelation consistent covariance matrix estimation. Econometrica, 59(3), 817–858.

Andrews, D.W.K., &Monahan,J.C.(1992).Animprovedheteroskedasticity andautocorrelation consistent auto covariance matrix. Econometrica, 60(4), 953–966.

Annuar, M. N., Ariff, M., & Shamsher, M. (1993). Weak-form efficiency of the Kuala Lumpur Stock Exchange: an application of unit root analysis. Pertanika Journal of Social Sciences and Humanities, 1, 57–62.

Annuar, M. N., & Shamsher, M. (1993). The efficiency of the Kuala Lumpur Stock Exchange: A collection of empirical findings. Selangor, Malaysia: Universiti Putra Malaysia Press.

Annuar, M. N., Ariff, M., & Shamsher, M. (1994). Is Kuala Lumpur’s emerging share market efficient? Journal of International Financial Markets, Institutions and Money, 4(1/2), 89–100.

Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrics, 70, 9–38.

Baltagi, B. H. (2001). Econometric analysis of panel data. Chichester, UK: John Wile & Sons.

Barnes, P. (1986). Thin trading and stock market efficiency: The case of the Kuala Lumpur Stock Exchange. Journal of Banking Finance and Accounting, 13, 609–617.

Bashir, T., Ilyas, M., & Furrukh, A. (2011). Testing the weak-form efficiency of Pakistani Stock Market - An empirical study in banking sector. European Journal of Economics, Finance and Administrative Sciences, 31, 160–175.

Bodie, Z., Kane, A., & Marcus, A. J. (2008). Essential of Investments (Seventh Edition). McGraw-Hill Higher Education.

Breitung, J. (2000). The local power of some unit root tests for panel data. In B. H. Baltagi (Ed.), Nonstationary panels, panel cointegration, and dynamic panels. Advances in Econometrics, (15) (pp. 161–178).

Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier test and its applications to model specification in econometrics. Review of Economic Studies, 47(1),239–253.

Brock, W. A., Dechert, W. D., & Scheinkman, J. A. (1987). A test for independence based on the correlation dimension. Department of Economics, University of Wisconsin at Madison, University of Houston, and University of Chicago.

Cabral, R. (2013). A perspective on the symptoms and causes of the financial crisis. Journal of Banking & Finance, 37, 103–117.

Carrión-i-Silvestre, J. L., Barrio-Castro, T. D., & López-Bazo, E. (2005). Breaking the panels: An application to the GDP per capita. Econometrics Journal, 8, 159–175.

Cella, C., Ellul, A., & Giannetti, M. (2013). Investors’ horizons and the amplification of market shocks. The Review of Financial Studies, 26(7), 1607–1648.

Central Bank of Malaysia (2011). Financial Sector Blueprint 2011-2020.

Cheong, C. W. (2008). A sectoral efficiency analysis of Malaysian Stock Exchange under structural break. American Journal of Applied Science, 5(10), 1291–1295.

Chis¸ , D. M. (2012). Testing the martingale difference hypothesis in the European emerging unit-linked insurance markets. Procedia Economics and Finance, 3,49–54.

Chudik,A., Pesaran,M. H., & Tosetti, E.(2009).Weak and strong cross section dependence and estimation of large panels. European Central Bank Working Paper Series,. No. 1100/October.

Dana, B. E., & Cristina, S. L. (2013). Technical and fundamental anomalies, paradoxes of modern stock exchange markets. Economic Science Series, 22(1), 37–43.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of estimators for autoregressive time series with a unit root. Journal of American Statistical Association, 74, 427–431.

Fama, E. F. (1965). Random walks in stock market prices. Financial Analysts Journal, 21(5), 55–59.

Fiordelisi, F., & Marqués-Ibanez, ˜ D. (2013). Is bank default risk systematic? Journal of Banking and Finance, 37, 2000–2010.

FitzGerald, V. (2006). Financial development and economic growth: a critical view. Background Paper for World Economic and Social Survey 2006.

Gaganis, C., Hasan, I., & Pasiouras, F. (2013). Efficiency and stock returns: Evidence from the insurance industry. Bank of Finland Research Discussion Paper,.No.14/2013.

Habibullah, M. S., Makmur, M. I., Wan Ngah, W. A. S., Alias, R., & Ong, H. B. (2005). Bank efficiency and the efficient market hypothesis: The case for bank stock prices in KLSE. Savings and Development, 29(4), 363–390.

Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. Econometrics Journal, 3(2), 148–161.

Hinich, M. J., & Patterson, D. M. (1995). Detecting epochs of transient dependence in white noise. Mimeo: University of Texas at Austin.

Howell, P., & Bain, K. (2005). The economics of money, banking and finance (Third Edition). UK: Prentice Hall Financial Times.

Hubbard, R. G. (2008). Money, the financial system, and the economy (Sixth Edition). US: Pearson Education.

Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53–74.

International Monetary Fund.(2014). Malaysia financial sector assessment program, financial sector performance, vulnerability and derivatives-technical note. IMF Country Report,. No.14/98.

Ioannidis, C., Molyneux, P., & Pasiouras, F. (2008). The relationship between bank efficiency and stock returns: evidence from Asia and Latin America. University of Bath School of Management Working Paper Series,. No. 2008.10.

Ito, T. and Hashimoto,Y.(2007). Bank restructuring inAsia: Crisismanagementin the aftermath of the Asian financial crisis and prospects for crisis prevention. RIETI Discussion Paper Series, 07-E-039. The Research Institute of Economy, Trade and


Janoudi, S. (2014). Banking efficiency and stock performance in the EU markets: The impact of the world financial crisis. University of Leicester Working Paper Series.

Jomo, K.S. (2005). Malaysia’s September 1998 controls: background, context, impacts, comparisons, implications, lessons. G-24 Discussion Paper,No. 36.

Kapetanios, G., Shin, Y., & Snell, A. (2003). Testing for a unit root in the non-linear STAR Framework. Journal of Econometrics, 112, 359–379.

Kasman, S., & Kasman, A. (2011). Efficiency, productivity and stock performance: evidence from the Turkish banking sector. Panoeconomicus, 3, 355–372.

Kirkwood, J. and Nahm, D. (2005). Australian banking efficiency and its relation to stock returns. Available at: kwood ABE 2.pdf.

Kok, K. L., & Goh, K. L. (1995). Malaysian Securities Market. Petaling Jaya, Selangor: Pelanduk Publications.

Kok, K. L., & Lee, F. F. (1994). Malaysian second board stock market and the efficient market hypothesis. Malaysian Journal of Economic Studies, 31(2), 1–13.

Kurozumi, E. (2002). Testing for stationarity with a break. Journal of Econometrics,

(1), 63–99.

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54(1–3),


Lai, M. M., Balachandher,K. G., & Fauzias, M. N.(2003).An examination ofthe random walk model and technical trading rules in the Malaysian stock market. Quarterly Journal of Business and Economics, 41(1/2), 81–103.

Laurence, M.(1986). Weak-form efficiency in the Kuala Lumpur and Singapore stock markets. Journal of Banking and Finance, 10, 431–445.

Levine, R.(1996). Stock markets: a spur to economic growth. Finance & Development, 7–10.

Levin, A., Lin, C. F., & Chu, C. S. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108, 1–24.

Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. The American Economic Review, 88(3), 537–558.

Lim, K. P. (2008). Sectoral efficiency of the Malaysian stock market and the impact of the Asian financial crisis. Studies in Economics and Finance, 25(3), 196–208.

Lim, K. P., Tan, H. B., & Law, S. H. (2007). Returns predictability of Malaysian bank stocks: Evidence and implications. IJMS, 14(1), 89–108.

Lim, K. P., Liew, V. K. S., & Wong, H. T.(2005). Weak-form efficient market hypothesis versus behavioural finance: a different perspective drawn from the Malaysian stock market. IJMS, 12(1), 1–27.

Liu, J., Wu, S., & Zidek, J. V. (1997). On segmented multivariate regression. Statist Sinica, 1, 497–525.

Maddala, G. S., &Wu, S.(1999).Acomparative study of unit roottests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631–665.

Miller, M. and Luangaram, P. (1998). Financial crisis in East Asia: Bank runs, asset bubbles and antidotes. Working Paper, No.11/98, Centre for the Study of Globalisation and Regionalisation (CSGR), The University of Warwick.

Munir, Q., Kok, S. C., & Furouka, F. (2012). The EMH revisited: Evidence from the five small open ASEAN stock markets. The Singapore Economic Review, 57(3.).

Munir, Q., & Mansur, K. (2009). Is Malaysian stock market efficient? Evidence from threshold unit root tests. Economic Bulletin, 29(2), 1359–1370.

Narayan, P. K., & Narayan, S. (2007). Mean reversion in stock prices: new evidence from panel unit root tests. Studies in Economics and Finance, 24(3), 233–244.

Narayan, P. K., Narayan, S., Popp, S., & Ahmad, H. A. (2015). Is the efficient market hypothesis day-of-the-week dependent? Evidence from the banking sector. Applied Economics, 47(23), 2359–2378.

Narayan, P. K., & Smyth, R. (2004). Is South Korea’s stock market efficient? Applied Economics Letters, 11, 707–710. O’ Connell, P. G. J. (1998). The overvaluation of purchasing power parity. Journal of International Economics, 44, 1–20.

Osborne, J. (2002). Notes on the use of data transformations. Practical Assessment, Research & Evaluation, 8(6.).

Perron, P. (1989). The Great Crash, the oil price shock, and the unit root hypothesis. Econometrica, 57, 1361–1401.

Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75, 335–346.

Pesaran, M.H. (2004). General diagnostic tests for cross section dependence in panels. IZA Discussion Paper Series, DP N. 1240, Institute for the Study of Labor, Bonn.

Radelet, S. and Sachs, J. (1998). The onset of the East Asian financial crisis. NBER Working Paper, No.6680.

Ray, S. (2012). Revisiting the strength of Dow Theory in assessing stock price movement. Advances in Applied Economics and Finance, 3(3), 591–598.

Stengos, T., & Panas, E. (1992). Testing the efficiency of the Athens Stock Exchange: Some results from the banking sector. Empirical Economics, 17, 239–252.

Sufian, F., & Majid, A. (2007). Banks’ efficiency and stock prices in emerging markets: Evidence from Malaysia. Journal of Asia-Pacific Business, 7(4), 35–53.

Sufian, F., & Haron, R. (2009). On the efficiency of the Malaysian banking sector: A risk-return perspective. International Journal of Commerce and Management, 19(3), 222–232.

Ucar, N., & Omay, T. (2009). Testing for unit root in nonlinear heterogeneous panels. Economics Letters, 104, 5–8




How to Cite

Ching Kok, S. ., & Munir, Q. . (2015). Malaysian finance sector weak-form efficiency: Heterogeneity, structural breaks, and cross-sectional dependence. Journal of Economics, Finance and Administrative Science, 20(39), 105–117. Retrieved from