Examining the weak form of the efficient market hypothesis in certain commodity price movements

Abstract

Investors continuously seek opportunities to obtain major returns when participating in the market. This is done by optimising trading strategies and effectively diversifying investment portfolios. Comprehensive market information is essential for investors to achieve this. One way of diversifying portfolios and improving trading strategies is to invest in metal commodities. Metal commodities are generally highly volatile. This presents opportunities for investors to place themselves in a position to achieve major returns in the commodity market. However, the Efficient Market Hypothesis (EMH) asserts that all information is already incorporated in market prices. Based on the EMH, no investor should be able to achieve abnormal returns when participating in the market. There has been great controversy regarding the EMH over the last few decades. Research has shown that the theory has been both supported and disputed. This study examined the weak-form of the EMH on certain commodity price movements. The study was focused on three metal commodities over a sample period from January 2011 to June 2017. These commodities included gold, iron ore and platinum. Statistical methods such as the autocorrelations test, runs test and unit roots test were used to determine whether the price movements of these commodities were weak-form efficient. The results from all the methods used indicated that the price movement of these commodities is not weak-form efficient over the sample period. However, the autocorrelations test on gold price movement indicated an increase in weak-form efficiency over time. Furthermore, the study concluded that there are no significant differences in the level of weak-form efficiency between precious metals and non-precious metals.