Measuring the Time-Varying Market Efficiency in the Prewar Japanese Stock Market

Abstract

This study explores the time-varying structure of market efficiency of the prewar Japanese stock market based on Lo's (2004) adaptive market hypothesis (AMH). In particular, we measure the time-varying degree of market efficiency using new datasets of the stock price index estimated by Hirayama (2017a,b, 2018, 2019a, 2020). The empirical results show that (1) the degree of market efficiency in the prewar Japanese stock market varied with time and that its variations corresponded with major historical events, (2) Lo's (2004) the AMH is supported in the prewar Japanese stock market, (3) the differences in market efficiency between the old and new Tokyo Stock Exchange (TSE) shares and the equity performance index (EQPI) depends on the manner in which the price index is constructed, and (4) the price control policy beginning in the early 1930s suppressed price volatility and improved market efficiency.Comment: 22 pages, 6 figures, 4 table