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Transition, the Evolution of Stock Market Efficiency and Entry into EU: The Case of Romania

  • Barry Harrison

    ()

  • David Paton

In this paper we demonstrate that the measurement of stock market efficiency is an important activity in establishing whether eastern European countries satisfy the Copenhagen Criteria for EU membership. Specifically, we argue that developing an efficient stock market should be an important policy focus for countries with aspirations to join the EU as it helps to demonstrate the existence of a functioning market economy. We illustrate this issue by examining the evolution of stock market efficiency in the Bucharest Stock Exchange from mid-1997 to September 2002. We use a GARCH model on daily price data and model the disturbances using the Student-t distribution to allow for ‘fat-tails’. We find strong evidence of inefficiency in the Bucharest Stock Exchange in that the lagged stock price index is a significant predictor of the current price index. This result is robust to the inclusion of variables controlling for calendar effects of the sort that have been observed in more developed stock markets. The level of inefficiency appears to diminish over time and we find evidence consistent with stock market efficiency in Romania after January 2000. Copyright Springer 2005

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File URL: http://hdl.handle.net/10.1007/s10644-005-5060-y
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Article provided by Springer in its journal Economic Change and Restructuring.

Volume (Year): 37 (2005)
Issue (Month): 3 (09)
Pages: 203-223

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Handle: RePEc:kap:ecopln:v:37:y:2005:i:3:p:203-223
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  1. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  2. Keith Jefferis & Graham Smith, 2005. "The Changing Efficiency Of African Stock Markets," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 54-67, 03.
  3. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  4. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  5. Randall K. Filer & Jan Hanousek & Nauro F. Campos, 1999. "Do Stock Markets Promote Economic Growth," William Davidson Institute Working Papers Series 267, William Davidson Institute at the University of Michigan.
  6. Mendelson, Morris & Peake, Junius W., 1993. "Equity markets in economies in transition," Journal of Banking & Finance, Elsevier, vol. 17(5), pages 913-929, September.
  7. Morley, Bruce & Pentecost, Eric J., 1998. "Asset pricing and foreign exchange risk: econometric evidence for the G-7," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 317-329, April.
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