Examining market efficiency for large and small-capitalization of TOPIX and FTSE stock indices

This article uses parametric and nonparametric Variance Ratio (VR) tests of Lo and Mackinlay (1988) and Wright (2000) to re-examine the weak-form Efficient Market Hypothesis (EMH) for the large- and small-capitalization stock indices of TOPIX (Tokyo Stock Price Index) and FTSE (Financial Times Stock Exchange). Unlike the previous studies, the multiple VR test of Chow and Denning (1993) is the first extended to the nonparametric VR test of Wright (2000) as suggested by Luger (2003). The empirical results show that the weak-form EMH is supported for large-cap stock indices, but rejected for small-cap ones. This conclusion is further confirmed by using a rolling multiple VR tests.