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Predictability of stock markets with disequilibrium trading

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Author Info
Wojciech Charemza
Kalvinder Shields
Anna Zalewska

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Abstract

This paper analyses the predictability of a hypothetical market with freely negotiated prices on which exists a censoring of one-period returns which are in excess of an arbitrary level ('floor' and 'ceiling'). It is shown that the expected value of returns (adjusted for drift) conditional on last period information regarding the censoring are equal to zero (and therefore the market is not predictable in mean) if there is no intertemporal spillover on the market. A simple simulation model is proposed and applied for the analysis of the effects of intertemporal and cross-spillovers resulting from quantity constraints. Statistical predictability tests are proposed, based on the corrected Student- t statistic of a regression of returns of some information concerning the previous censoring. An illustrative empirical analysis of six main time series of returns on the Warsaw Stock Exchange confirms their ex-ante , but not ex-post , predictability.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 10 (2004)
Issue (Month): 5 (October)
Pages: 329-344
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Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:329-344

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Related research
Keywords: efficient markets; East European financial markets; censored returns;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  2. Claessens, Stijn & Dasgupta, Susmita & Glen, Jack, 1995. "Return Behavior in Emerging Stock Markets," World Bank Economic Review, Oxford University Press, vol. 9(1), pages 131-51, January.
  3. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wojciech W. Charemza & Ewa Majerowska, . "Regulation of the Warsaw Stock Exchange: The Portfolio Allocation Problem," Discussion Papers in European Economics 98/1, Department of Economics, University of Leicester. [Downloadable!]
    Other versions:
  2. Ewa Majerowska, . "Disequilibrium Trading and Market Constraints, Theoretical Foundations: The Case of the Warsaw Stock Exchange," Discussion Papers in European Economics 99/2, Department of Economics, University of Leicester. [Downloadable!]
  3. Dorofeev Evgeny, 2000. "Economic Factors Influence on the Russian Capital Market Behavior," EERC Working Paper Series 2k-03e, EERC Research Network, Russia and CIS. [Downloadable!]
  4. Ewa Majerowska, . "Validity of the optimal portfolio allocation model with price constraints on the example of the Warsaw Stock Exchange," Discussion Papers in European Economics 99/5, Department of Economics, University of Leicester. [Downloadable!]
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This page was last updated on 2009-11-25.

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