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Evolving Market Efficiency with an Application to Some Bulgarian Shares

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  • Rebecca Emerson
  • Stephen G. Hall
  • Anna Zalewska-Mitura

Abstract

With new technically advanced methods and computers at our disposal, the efficient market hypothesis is once again being debated. At the same time, we are witnessing an unprecedented growth in both existing and new financial markets. These new markets are often in economies which have just recently embraced free market economics; we term these stock markets infant markets. Such stock markets are obviously not efficient in allocating the supply of savings to productive capital. We do not test whether or not these infant markets are informationally efficient, but instead examine whether and how they are becoming more efficient. We propose modelling the excess returns of individual securities using a multi-factor model with time-varying coefficients and generalised auto-regressive conditional heteroskedastic (GARCH) errors. If the markets are becoming more informationally efficient or the agents are learning, we would expect this to manifest itself as the time-varying coefficients becoming more stable as time increases. We test our model using data on four Bulgarian shares. First, we estimate an AR(2) model and a GARCH-M(1,1) model for the shares. Then, we estimated our AR(2) model with time varying coefficients and GARCH type errors. We find varying levels of efficiency and varying speeds of movement towards efficiency within our sample of four shares. Copyright Kluwer Academic Publishers 1997

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Paper provided by Department of Economics, University of Leicester in its series Ace Project Memoranda with number 96/18.

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Handle: RePEc:wuk:leiapm:96/18

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References

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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. Dwyer, Gerald Jr. & Wallace, Myles S., 1992. "Cointegration and market efficiency," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 318-327, August.
  3. Hall, Stephen G & Miles, David K, 1992. "Measuring Efficiency and Risk in the Major Bond Markets," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 599-625, October.
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Cited by:
  1. Céline Gimet & Thomas Lagoarde-Segot, 2011. "A closer look at financial development and income distribution," Working Papers 1104, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Radosław Cholewiński, 2009. "Real-Time Market Abuse Detection with a Stochastic Parameter Model," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 1(3), pages 261-284, November.
  3. Kaie Kerem & Enn Listra & Katrin Rahu, 2004. "Market Efficiency and Rational Expectations," Working Papers 112, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  4. Zalewska, Ania, 1999. "Does Market Organization Speed Up Market Stabilization? First Lessons From the Budapest and Warsaw Stock Exchanges," CEPR Discussion Papers 2134, C.E.P.R. Discussion Papers.
  5. Abdmoulah, Walid, 2010. "Testing the evolving efficiency of Arab stock markets," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 25-34, January.
  6. Ben Rejeb, Aymen & Boughrara, Adel, 2013. "Financial liberalization and stock markets efficiency: New evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 17(C), pages 186-208.
  7. Charemza, Wojciech W. & Majerowska, Ewa, 2000. "Regulation of the Warsaw Stock Exchange: The portfolio allocation problem," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 555-576, April.
  8. Omay, Nazli C. & Karadagli, Ece C., 2010. "Testing Weak Form Market Efficiency for Emerging Economies: A Nonlinear Approach," MPRA Paper 27312, University Library of Munich, Germany.
  9. Crystal Xiaobei Chen, 2012. "The anatomy of short sales and price adjustment: evidence from the Hong Kong stock market," International Journal of Managerial Finance, Emerald Group Publishing, vol. 8(3), pages 204-218.
  10. Xiao-Ming Li, 2003. "Time-varying Informational Efficiency in China's A-Share and B-Share Markets," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 1(1), pages 33-56.
  11. Amira Akl Ahmed, 2014. "Evolving and relative efficiency of MENA stock markets: evidence from rolling joint variance ratio tests," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 91-126, May.
  12. 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.
  13. Zalewska-Mitura, Anna & Hall, Stephen G., 1999. "Examining the first stages of market performance: a test for evolving market efficiency," Economics Letters, Elsevier, vol. 64(1), pages 1-12, July.

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