The efficiency of speculative markets, as represented by Fama's 1970 fair g
ame model, is tested on weekly price index data of six Asian stock markets-
Hong Kong, Indonesia, Malaysia, Singapore, Taiwan, and Thailand-using Sherr
y's (1992) nonparametric methods. These scientific testing methods were ori
ginally developed to analyze the information processing efficiency of nervo
us systems. In particular, the stationarity and independence of the price i
nnovations are tested over 10 years, from June 1986 to July 1996. These tes
ts clearly show that all six stock markets lacked at least one of the two r
equired fair game attributes, and, accordingly, Fama's Efficient Market Hyp
othesis must be rejected for these Asian markets. However, Singapore emerge
d from these tests as the most efficient regional Asian stock market. A ten
tative ranking in order of stock market efficiency is: Singapore, Thailand,
Indonesia, Malaysia, Hong Kong, and Taiwan. Singapore's stock market prici
ng is closest to the speculative market behavior which can support stock op
tions. Our tests show both Hong Kong and Taiwan to be inefficient markets.
Both exhibit nonstationary (likely because of continuing institutional chan
ges) and dependent price innovations, making them particularly unsuitable f
or stock option pricing. In Taiwan the weekly price innovations show even h
igher order (Markov) dependencies. Although the price innovations in Malays
ia, Thailand, and Indonesia are at least stationary at the weekly level, th
ey exhibit regular higher order transitions and the large sustained movemen
ts in both bull and bear markets, which are so characteristic for illiquid
emerging markets. All six Asian stock markets exhibit strong price trend be
havior, which, perhaps, can be profitably exploited by technical analysis w
ith first-order Markov filters (e.g., Kalman filters) in windows of between
a week and more than a month.