A Comprehensive Assessment of the Efficiency of the New Zealand Stock Market

Symons, Daniel
Garel, Alexandre
Frijns, Bart
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Master of Business
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Auckland University of Technology

An efficient market is one in which the market price, at any point in time, reflects all relevant information available at that time. The three forms of efficiency are: weak form, which says that past prices are fully reflected in the current price; semi-strong form, where public information is fully reflected; and strong form, where insider knowledge is fully reflected. To determine whether the New Zealand market is weak form efficient, this paper uses an Augmented Dickey Fuller test for unit-roots to assess whether past prices can explain future returns in the NZX 50; and tests for seasonality in the NZX 50 through tests for a day-of-the-week effect, a week-of-the-year effect, a monthly effect, and a holiday effect to assess whether certain periods provide an exploitable return. To determine the efficiency of other information, and particularly insider information, a regression was run to measure the performance of managed funds compared to the NZX 50 New Zealand market benchmark. The results for the unit-root test are consistent with efficiency, with the market exhibiting a unit-root. The tests for seasonality show that there are a few anomalies that exist, but these do not entirely stand up as evidence against efficiency as there is no strategy that exists whereby excess risk-adjusted return could be made by trading around these periods, although investors may use them to time their trades. The analysis of the New Zealand funds show that they do outperform the market, but the evidence is not strong enough to confirm either efficiency nor inefficiency. This paper contributes to the literature by providing a broader analysis of the New Zealand stock market’s efficiency after the impact of the Global Financial Crisis and formation of a 50-stock index. It also contributes to the industry by cautioning investors about using past price data to predict returns, although the results do show that there are opportunities for gain in the timing of trades. Furthermore, this paper shows that managed funds may be able to outperform the market using insider information.

Market efficiency , Seasonality , Fund performance , NZX
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