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ArticleUniversity of Akureyri>Viðskipta- og raunvísindasvið>Working Paper Series>

Please use this identifier to cite or link to this item: http://hdl.handle.net/1946/1097


A Test of Market Efficiency: Evidence from the Icelandic Stock Market


This extensive study examines the relationship between the price-to-earnings (P/E)
ratio, the market-to-book (M/B) ratio, dividend yields, size, past returns, and current
returns of Icelandic stocks. The study uses monthly return data on stocks from the
Iceland Stock Exchange from January 1993 to June 2003. The model, which uses
multiple regression analysis with dummy variables, is based on the classical Capital
Asset Pricing Model, so the beta coefficient is the sole measure of risk. The findings
are that the returns of stocks with a low P/E ratio are much higher than returns of
other stocks, and that these returns are statistically significantly higher when
differences in systematic risk are accounted for. The returns of small stocks and stocks
with a low M/B ratio are higher than that of other stocks but the difference is not
statistically significant. However, there is no relationship between current returns and
historical returns, or between returns and dividend yields.
JEL classification: G12
Keywords: Market efficiency, Icelandic stock market, P/E ratio


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