THE EFFICIENCY OF THE INTERNATIONAL MONEY MARKETS

• DOI: http://doi.org/10.1111/j.1468-5957.1982.tb00983.x
• Published date: 01 June 1982
• Date: 01 June 1982
• Author: Donald J. Puglisi,Thomas H. McInish

THE EFFICIENCY

OF

THE INTERNATIONAL MONEY MARKETS

Thomas

H.

McInish and Donald

J.

Puglisi*

Introduction

The market for a particular security is efficient if the price of that security

completely reflects available information pertaining to that security. The

practical significance of an efficient market is that, in an efficient market, an

investor using available information to develop investment strategies cannot

expect to earn a rate of return which will be in excess of the return expected

from a buy-and-hold policy of a given risk, well diversified portfolio.

To facilitate empirical testing, the efficient market hypothesis

(EMH)

is

delineated into three forms. The three forms differ in terms of the types of

information which are used in developing investment strategies. The strong form

of the

EMH

is the broadest or most liberal of the three forms in terms of infor-

mation set specification. The strong form expands the information set to include

aZZ information, both publicly and privately available. Thus, under the strong

form, even those with insider information cannot expect to earn abnormal

profits, i.e., those in excess of what should be expected for the level of

risk

incurred.

The semi-strong form of the

EMH

limits the information set to publicly avd-

able information. The implication of

this

form is that those who perform such

basic investment procedures as forecasting the economy, analyzing corporate

financial statements, etc., cannot earn abnormal profits through the use of those

techniques.

The weak form of the

EMH

has the most narrowly defined information set,

limited to the historical sequence

of

prices.

As

proven by Samuelson

(1965),

a

sufficient condition for weak form efficiency is that security prices fluctuate

randomly. This leads to the often stated premise that a market is efficient in the

weak form if the prices

of

its securities follow random walks. This is the

equivalent to stating that, in an efficient market, successive price changes are

statistically independent of one another. The investor in such a market cannot

expect

to

fmd any patterns in the historical sequence of prices for a security

which would give insight into future price movements and, therefore, the oppor-

tunity to earn abnormal profits as

the

fruits of such efforts.'

There have been a number of empirical tests performed on the weak form of

the

EMH

as it applies to a variety of different securities. The most extensive

tests have been conducted

on

common stocks in the

US?

To a lesser extent,

these tests have been applied to stock markets outside the

US.

The non-US stock

market tests include efficiency determination for markets of German stocks by

*The authors are members

of

the Department

of

Business Administration at

the University

of

Delaware.

(Paper received March 1981, revised October 1981)

Journal

of

Business Finance

&

Accounting 9,2(1982)

I67