Title: Evolving efficiency of the Saudi Arabian stock market via Shannon entropy approach: a study on sector-based data

Authors: Hela Ben Hamida

Addresses: Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh, Saudi Arabia

Abstract: This paper attempts to analyse the time-varying degrees of weak-for efficiency (WFE) of the Saudi stock market (SSM) using sector-based data. The empirical approach is based on the modified Shannon entropy (SE) and the symbolic time series analysis for a dataset covering 15 sectors for the period (January 2007 to April 2012). Our results reveal significant departure from efficiency but the efficiency degree evolves over time. Also, we show the existence of structural breaks in the time-varying measure of efficiency indicating that the occurrence of extreme events strongly impacts the efficiency behaviour. Furthermore, we provide evidence that Shariah-compliant stocks behave differently from other firms in terms of the degree of WFE and its path over time. Overall, our findings provide several implications for portfolio managers and Saudi policy makers.

Keywords: stock markets; information efficiency; Shannon entropy; structural breaks; Shariah compliant stocks; weak-for efficiency; Saudi Arabia; portfolio management.

DOI: 10.1504/AAJFA.2014.063743

Afro-Asian Journal of Finance and Accounting, 2014 Vol.4 No.2, pp.112 - 140

Received: 02 Apr 2013
Accepted: 08 Aug 2013
Published online: 31 Jul 2014 *

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