Analysis of Random Walk and Market Efficiency in Standard & Poors 500 Index Using ARCH and GARCH Models

Abstract

Purpose - The aim of this study is to test the Efficient Market Hypothesis and to show its validity in Standard & Poors 500 index. Design/Methodology/Approach - Dickey-Fuller Unit Root Test, Phillips Perron Test and ARMA Test and ARCH and GARCH Model were used in this study. Findings - As a result of the study, assumptions of both random walk hypothesis and Efficient Market Hypothesis are rejected. Discussion - The efficient market hypothesis was tested by taking into consideration the series of daily yield data date between 31-12-2009 and 31-12-2018 of the shares of the S & P 500 index. The Efficient Market Hypothesis argues that an investor's return on its financial asset is not dealing with whether this investor is an active or passive investor. The Effective Market Hypothesis argues that the price of financial assets cannot be estimated by studying past price indices and other studies on assets.