The Relationship Between Economic Factors and Equity Markets in Central Europe
This paper investigates the possibility that newly emerging equity markets in Central Europe exhibit semi-strong form efficiency such that no relationship exists between lagged values of changes in economic variables and changes in equity prices. We find that such efficiency is characteristic of the Czech Republic where several economic factors create contemporaneous changes in equity prices, but no lagged factors cause current-period changes in the stock market. In the other three Central European countries, Hungary, Poland, and Slovakia, markets do not appear to be efficient and lagged economic factors do affect equity prices. Finally, we show that the Czech equity market is closely integrated with the German market while movements in prices in Hungary and Poland more closely follow movements in the U.S. market. Overall, the results are consistent with the Czech market reflecting underlying fundamentals, while the other three markets exhibit speculative bubbles dominated by foreign capital.
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