Academic journal article Journal of Economic Cooperation & Development

Malaysian Banking Sector Efficiency, Structural Breaks and Cross-Sectional Dependence: Empirical Evidence

Academic journal article Journal of Economic Cooperation & Development

Malaysian Banking Sector Efficiency, Structural Breaks and Cross-Sectional Dependence: Empirical Evidence

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Investors in the stock market have a tendency to invest for short-horizon (over periods of days, weeks, or months) as well as to speculate, instead of simply buy-and-hold regularly or invest for long-horizon. Moreover, some analysts view the stock markets in developing countries as casinos that have little impact on economic growth (Levine 1996:7). In fact, the market which is largely occupied by short-horizon investors is exposed to the higher risk of capital inflow reversal. Radelet and Sachs (1998) reveal that Malaysia is amongst the Asian countries that has experienced the tremendous adverse impact from Asian financial crisis through the withdrawals of foreign capitals aftermath to the crisis. In particular, technical analysis hints that stock prices or returns are somewhat predictable. Technical analysts perceive a stock series will enrol in trends and these trends tend to repeat in future (see Dana and Cristina 2013). The tenet of chartist or technical theories is the assumption that historical stock price behaviour tends to recur in future, hence successive price changes are dependent and can predict the future movements of stock prices (Fama 1965). One famous technical theory is the Dow Theory. According to Ray (2012), Dow Theory holds that there are three main components in the movement of stock prices, namely, the primary trend or long-term trend which provides the grounds for bull and bear markets, the secondary trend which shows temporary reversal in the primary trend, and the daily fluctuations in stock prices are perceived meaningless. On the other hand, the weak-form efficient market hypothesis (EMH) is the assertion that stock prices fully reflect the information contained in the history of past trading (Bodie et al. 2008). This is consistent with the theory of random walks which states that stock price changes would have no memory and cannot predict the future movements of prices in a meaningful way (Fama 1965).

Mostly the past studies of weak-form EMH in the context of Malaysia are prominence to the stock market efficiency at the aggregate level by using the data of FTSE Bursa Malaysia KLCI (FBMKLCI) index prices, for examples, Lim et al. (2005), Lim (2008), and Munir and Kasim (2009). Firm-level disaggregation is crucial to pinpoint the efficiency and inefficiency for individual stocks. However, there are only a handful of past studies that focus on bank stocks in Malaysia. One example is the study of Lim (2007) which concentrates on four selected bank stocks. Several other past studies have employed the data envelopment analysis (DEA) method to study the relationship between technical efficiency and bank stock returns, including Habibullah et al. (2005), Sufían (2006), Sufían and Majid (2007), and Sufían and Harón (2009). Nevertheless, these studies are more towards the semi-strong form EMH. Currently, the current literature cannot provide a clear consensus on this matter. Bank stocks efficiency is more predominant compared to the stocks from other sectors. Banks act as the traditional financial intermediaries that match the borrowers and savers in an economy. They play an important role in allocating capital among all the productive real sectors. Levine and Zervos (1998) provide evidence showing bank credit predicts the growth in output, capital stock, and productivity. FitzGerald (2006) claims that banks have remained as the key element in the financial system, especially when we consider most of the non-bank financial intermediaries are owned by banks. Moreover, the role of banks is extended to asset management and fee-based services.

The EMH is widely known for having pivotal implications in terms of resource allocation, the predictability of stock prices, trading strategy, forecasting techniques, and the effect of shocks to stock prices. First, from the standpoint of policy makers, efficiency is essential for enabling an effective allocation of capital among the productive real sectors through the stock market. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.