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Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

  • M. Kabir Hassan


    (University of New Orleans, USA)

  • Anisul M. Islam

    (University of Houston-Downtown, USA)

  • Syed Abul Basher

    (York University, Canada)

This paper empirically examines the issue of market efficiency and time-varying risk return relationship for Bangladesh, an emerging equity market in South Asia. The study utilizes a unique data set of daily stock prices and returns compiled by the authors which was not utilized in any previous study. The Dhaka Stock Exchange (DSE) equity returns show positive skewness, excess kurtosis and deviation from normality. The returns display significant serial correlation, implying stock market inefficiency. The results also show a significant relationship between conditional volatility and the stock returns, but the risk-return parameter is negative and statistically significant. While this result is not consistent with the portfolio theory, it is possible theoretically in emerging markets as investors may not demand higher risk premia if they are better able to bear risk at times of particular volatility (Glosten, Jagannathan and Runkle, 1993). While circuit breaker overall did not have any impact on stock volatility, the imposition of the lock-in period has contributed to the price discovery mechanism by reverting an overall negative riskreturn time-varying relationship into a positive one. As a policy to improve the capital market efficiency, the timely disclosure and dissemination of information to the shareholders and investors on the performance of listed companies should be emphasized.

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Paper provided by York University, Department of Economics in its series Working Papers with number 2002_6.

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Length: 25 pages
Date of creation: Mar 2000
Date of revision: Jun 2002
Handle: RePEc:yca:wpaper:2002_6
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