Evaluating the Efficiency of the Swedish Stock Market: a Markovian Approach

Abstract

This paper evaluates weak form efficiency of the Swedish stock market, by testing whether or not the index OMXSPI follows a random walk. The returns of the index are mapped onto one of two states, and the resulting data set is treated as a higher- order Markov chain for the purpose of analysis. The Bayesian information criterion is used to determine the optimal order of the chain and the null hypothesis that the chain is of order zero is tested against the alternative that the chain is of the established optimal order. We find that random walk behaviour cannot be rejected for the period January 2000 to April 2015.