On the Efficient Market Hypothesis of Stock Market Indexes: The Role of Non-synchronous Trading and Portfolio Effects

In this article, the long-term behavior of the stock market index of the New York Stock Exchange is studied, for the period 1950 to 2013. Specifically, the CRSP Value-Weighted and CRSP Equal-Weighted index are analyzed in terms of market efficiency, using the standard ratio variance test, considering over 1600 one week rolling windows. For the equally weighted index, the null hypothesis of random walk is rejected in the whole period, while for the weighted market value index, the null hypothesis start to be accepted from the 1990s. In order to explain this difference, we raised the hypothesis that this behavior can be explained by the joint action of portfolios and non-synchronous trading effects. To check the feasibility of the above assumption, we performed a simulation of both effects, on two- and six-asset portfolios. The results showed that it is possible to explain the empirical difference between the two index, almost entirely by the joint effects of portfolio and non-synchronous trading.