Measuring the Time-Varying Market Efficiency in the Prewar and Wartime Japanese Stock Market, 1924-1943

TL;DR

This paper investigates how market efficiency in prewar and wartime Japan varied over time, influenced by historical events and government interventions, supporting the adaptive market hypothesis using a new capitalization-weighted index.

Contribution

It introduces a new market capitalization-weighted stock price index and demonstrates that market efficiency in Japan's wartime era varies with historical events, supporting the adaptive market hypothesis.

Findings

Market efficiency varies over time and with major events.

The new index shows different efficiency patterns than previous studies.

Efficiency declined as war risks increased, especially during the Pacific War.

Abstract

This study explores the time-varying structure of market efficiency in the prewar and wartime Japanese stock market using a new market capitalization-weighted stock price index, the equity performance index. We examine whether the adaptive market hypothesis (AMH) is supported in that era. First, we find that the degree of market efficiency in the prewar and wartime Japanese stock market varies over time and with major historical events. This implies that the AMH is supported in this market. Second, we find that the variation in market efficiency observed in this study is significantly different from that in previous studies because of whether the price index is capitalization weighted. Finally, as government intervention in the market intensified throughout the 1930s, market efficiency declined as the war risk premium rose, especially from the time when the Pacific War became inevitable.