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Estimating the Dynamics of Weak Efficiency on the Prague Stock Exchange Using the Kalman Filter

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    Abstract

    The paper builds on the martingale representation of the market efficiency hypothesis and, with the use of an E-GARCH model of the volatility of the PX and PX-GLOBAL daily returns, a state-space model is formulated. Using the Kalman filter, the time-varying dependency of the daily returns on their lagged values is estimated. The estimation of this parameter shows how quickly the Prague Stock Exchange, represented by its PX index and PX-GLOBAL index, has gradually moved toward the condition of weak efficiency.

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    File URL: http://journal.fsv.cuni.cz/storage/1131_1131_str_248_260--posta.pdf
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    Bibliographic Info

    Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

    Volume (Year): 58 (2008)
    Issue (Month): 05-06 (August)
    Pages: 248-260

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    Handle: RePEc:fau:fauart:v:58:y:2008:i:5-6:p:248-260

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    Keywords: GARCH; Kalman filter; martingale; weak-efficiency;

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    1. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    2. Rockinger, Michael & Urga, Giovanni, 2000. "The Evolution of Stock Markets in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 28(3), pages 456-472, September.
    3. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    4. Xiao-Ming Li, 2003. "China: Further Evidence on the Evolution of Stock Markets in Transition Economies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(3), pages 341-358, 08.
    5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    6. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
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    Cited by:
    1. Vít Pošta, 2009. "The Role of fundamentals factors of empirical analysis of the Prague stock exchange," Ekonomika a Management, University of Economics, Prague, vol. 2009(3).
    2. Walid Abdmoulah, . "Testing the Evolving Efficiency of 11 Arab Stock Markets," API-Working Paper Series 0907, Arab Planning Institute - Kuwait, Information Center.

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