Testing Market Efficiency on Oslo Stock Exchange. Can common abnormal return anomalies' predictive abilities create arbitrage opportunities?

Abstract

This thesis studies the predictive abilities of the abnormal return anomalies of size, value and return momentum on Oslo Stock Exchange to determine possible forms of market inefficiency. Factor mimicking portfolios representing the anomalies are created for the sample period. The sample period is divided into two smaller sub-periods where the first sub- period is used to observe the anomalies, while sub-period 2 tests for market efficiency. Optimally weighted portfolios of the individual anomaly portfolios in sub-period 1 are constructed with and without restrictions of short-sale and gearing to compare performance to a benchmark market index. Using the portfolio weights obtained in the previous period, I analyse the portfolios’ performance relative to the benchmark.

When assessing the overall sample period, the value anomaly yields statistically significant abnormal returns compared to the benchmark index. The statistics of the return momentum factor reports excess returns over the market index, but the results are not sufficiently significant to conclude the existence of abnormal returns related to return momentum. The results of the statistical analyses imply that there is no size effect apparent on Oslo Stock Exchange in the sample period.

Both the restricted and non-restricted optimally constructed portfolios of size, value and return momentum produces abnormal returns compared to the benchmark index. However, t- statistics of the portfolios determine that the returns are not significant at a 95% confidence interval as the portfolios reports p-values > 0,05. Based on the trading strategy proposed in this thesis, I cannot conclude that the efficient market hypothesis is violated.

The results of the thesis indicate that some arbitrage opportunities do exist based on the value anomaly, demonstrating a violation of the semi-strong efficiency. However, the return anomalies of size and return momentum seems to be weak or non-existing on Oslo Stock Exchange in the sample period.