An Alternative Definition of Market Efficiency and some Comments on its Empirical Testing

Abstract

An alternative definition for market efficiency, based on econometric rather than financial arguments is suggested. It is argued that this new definition, though equivalent to the existing one, has some comparative advantages. Moreover, the conditions under which the results from the application of some commonly used methods for the empirical testing of market efficiency are meaningful are examined, and guidelines for practitioners are suggested. Further, market efficiency is examined in a time-varying risk framework.Market efficiency; Return predictability; Serial correlation in stock returns; Market efficiency in the presence of conditional heteroscedasticity