Title: The efficient market hypothesis: the applicability of quantitative methods to foreign stocks traded as American depository receipts (ADRs)

Authors: Darrol J. Stanley; Michael D. Kinsman; Bruce A. Samuelson

Addresses: Graziadio School of Business and Management, Pepperdine University, 24255 Pacific Coast Highway, Malibu, California 90263, USA ' Graziadio School of Business and Management, Pepperdine University, 24255 Pacific Coast Highway, Malibu, California 90263, USA ' Graziadio School of Business and Management, Pepperdine University, 24255 Pacific Coast Highway, Malibu, California 90263, USA

Abstract: The efficient market hypothesis assumes each security's price remains at continuous parity with its investment value. This presumption elicits challenge. The efficient market hypothesis denies that mechanical trading rules from either price or fundamental data are investment strategies capable of outperforming market averages on a risk-adjusted basis after transaction costs. US academic literature is now presenting contrary evidence. Vigorous investigations into alleged validity of the efficient market hypothesis challenge scholarly investigators to uncover pockets of inefficiency in their attempts to disprove market efficiency. This study cited two noted anomalies from the US markets. The two analyses were applied to the American depository receipt stock market to determine whether these anomalies likewise exist. This study investigates the weak-form through a price momentum reversal and volume strategy. Further, it investigated a semi-strong form EMH through a mechanical trading strategy of price momentum reversal and value and earnings momentum. The study period was for ten years ending December 31, 2011 incorporating monthly rebalancing equally-weighted. Results were formulated on a total return basis and expressed on a geometric basis. The top monthly weak-form portfolio supported the efficiency of the market. The top monthly semi-strong portfolio indicated a pocket of exploitable inefficiency.

Keywords: American depository receipts; ADRs; ADR performance; ADR trading strategies; American international investing; USA; United States; quantitative methods; foreign stocks; market hypothesis; stock markets; price momentum reversal; volume strategy; value and earnings momentum.

DOI: 10.1504/IJESB.2013.055304

International Journal of Entrepreneurship and Small Business, 2013 Vol.19 No.3, pp.293 - 308

Published online: 30 Sep 2013 *

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