Thin Trading and Stock Market Efficiency: the Case of the Kuala Lumpur Stock Exchange

• Author: Paul Barnes
• Published date: 01 December 1986
• DOI: http://doi.org/10.1111/j.1468-5957.1986.tb00522.x
• Date: 01 December 1986

Journal

OfBUriness

Finance

tYAccounfing,

13(4)

Winter

1986, 0306 686X $2.50

THIN TRADING AND STOCK MARKET EFFICIENCY:

THE CASE OF THE KUALA LUMPUR

STOCK EXCHANGE

PAUL

BARNES*

INTRODUCTION

Stock market efficiency is an important concept, both in terms of an

understanding of the working of capital markets, and in their performance and

contribution of the development of a country’s economy.’ ‘Efficiency’ relates

to whether all relevant information is available to investors and that it is already

reflected in security prices. If this exists, then there is an effective mechanism

for the accumulation and allocation of savings within the private sector of an

economy.

The efficiency of a particular market is dependent upon certain conditions,

particularly, the volume of trading.’ Market thinness (low volume of trading)

makes it difficult

for

traders to react to new information (and therefore prices to

reflect it). Additionally, in smaller markets,

it

is easier for large traders to

manipulate the market. While it is generally accepted that the major

exchanges, are efficient in both the weak and semi-strong forms of the efficient

capital markets hypothesis (ECMH) (for example, Fama, 1970), it is an

interesting empirical question whether, and to what extent, this is also the case

with the less developed stock exchanges. Generally, the empirical studies have

shown these exchanges not to

be

efficient although the findings are varied and

not clear

The Kuala Lumpur Stock Exchange (KLSE) is a developing exchange.

A

study by Dawson (1981) showed that it was not efficient in the semi-strong

form,

as

indicated by published stock recommendations. (If these lead

to

abnormal returns then the market is inefficient in that form, Dawson, 1984,

and Firth, 1972). The remainder of this paper reports a series of weak-form

tests on the KLSE. The KLSE is small compared with the London Stock

Exchange (LSE). Market valuation is considerably smaller (E2bn compared

with f240bn in 1979). The difference between their turnovers expressed

as

a

ratio was 1:84. (Turnover in 1979 on the LSE was E24106m and on the KLSE

it

was E286m.) However, there were actually more shares (6bn compared with

4.5bn) due to typically small par values of KLSE shares.

The data examined consists of thirty companies and

six

sector indices for the

’

The author is Senior Research Fellow in

Managerid

Finance and Accounting at Manchcster

Buiiness School.

He

would

like

to thank

Mr

Ten8

Lew

Lim

for

his computational aasistance and

Mr

Steve

Clode

for

his helpful comments.

(Paper

received March

1985,

revised December

1985)

609