This paper introduces a model, based on the Kalman filter framework, which allows for time varying parameters, latent factors, and a general GARCH structure for the residuals. With this extension of the Bekaert and Harvey (1997) model it is possible to test if an emerging stock market becomes more efficient over time and more integrated with other already established markets in situations where no macroeconomic conditioning variables are available. We apply this model to the Czech, Polish, Hungarian, and Russian stock markets. We use data at daily frequency running from April 7th 1994 to July 10th 1997. A latent factor captures macroeconomic expectations. Concerning predictability, measured with time varying autocorrelations, Hungary reached efficiency before 1994. Russia shows signs of ongoing convergence towards efficiency. For Poland and the Czech Republic we find no improvements. With regard to market integration there is evidence that the importance of Germany has changed over time for all markets. Shocks in the UK are positively felt on the Czech and Polish markets but not on the Russian or the Hungarian ones. Shocks in the US have no impact on these markets but the Russian one. A strong negative correlation between Russia and the US and Germany tends to disappear. We also show that for the transition economies under investigation stock returns exhibit significant asymmetric GARCH effects where bad news generate greater volatility. The exception to this rule is Hungary where good news cause greater volatility than bad volatility. This leads us to formulate a liquidity hypothesis.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2346.
Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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.)