Testing the Efficient Market Hypothesis in Emerging Markets

Abstract

This thesis investigates market efficiency in Emerging Markets, and the impact of active share level, by examining mutual fund's ability to generate significant alpha values. Therefore, the Efficient Market Hypothesis is tested, as it would not be possible for mutual funds to obtain significant alpha values in a fully efficient market. This is tested by applying the Single Index Model, the Farma-French 3-factor model and the Carhart 4-factor model to a dataset consisting of monthly returns for 204 Emerging Market focused mutuals funds over a 10-year period. For the investigation of active share levels, the full data sample is divided into three subsamples based on active share level. Furthermore, this thesis offers a comprehensive analysis of the Emerging Market concept which results in a unified definition hereof. This thesis finds that Emerging Markets are not fully efficient, as a large proportion of the investigated mutual funds generate significant alphas over the 10-year period. However, some degree of efficiency is present within these markets, as the mutual funds with the highest active share do not obtain the largest proportion of significant alpha values. These findings challenge the existence of the Efficient Market Hypothesis within Emerging Markets, as asymmetric information is present leading to not fully efficient markets, that can be exploited for significant profits.