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Market efficiency of the Post Communist East European stock markets

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Abstract

The stock markets from Post Communist East-European Countries are still considered highly speculative. For this reason, the previously performed tests often infirmed the efficient market hypothesis. However, especially in the past years, different studies revealed an improvement in the level of efficiency. In this context, our paper has tested the predictability of returns based on past records (as a proxy for the weak-form efficiency) for the market index and the most important stocks of 20 East European former communist countries: Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Latvia, Lithuania, Former Yugoslav Republic of Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, and Ukraine, for the period January 2008–December 2010, a period of financial crisis for most of these countries. Various methods for testing were used (unit root tests, runs test, variance ratio test, filter rules test and the January Effect). The tests have revealed that for some assets the efficient market hypothesis cannot be rejected. However, the results have shown that there are serious doubts concerning the stock market efficiency for all the countries in the analyzed period. Moreover, heterogeneity between the results for different countries was revealed. A higher level of market efficiency can suggest to decision-makers the use of passive portfolio management techniques while a lower level of efficiency implies the use of active portfolio management instruments.

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Notes

  1. During the past years, many studies tested the informational efficiency in this region. See Table 2 for a list of such studies.

  2. The stock exchanges included in this category are those from Warsaw (since 1817), Budapest (1864), Prague (1871), Bucharest (1882), Belgrade (1894), Zagreb (1907), Sofia (1914), Tallinn (1920) and Ljubljana (1924).

  3. There are some discussions regarding the borders of Europe. In this study, we have considered the Post Communist countries from Central and Eastern Europe and from the former Union of Soviet Socialists Republics (USSR). As long as in the second category in most of the Asian countries a capital market has not been formed yet or the information was not available, the only two disputable Asian countries included in this study are Georgia and Kazakhstan.

  4. Also, there is evidence that the expenses concerning education are modest, most of the countries using at most 5 % of GDP. However, there is a tendency of improvement for this situation. The greatest increase can be noticed in the case of the Moldova, from 5.5 % in 2002 to 9.57 % of the GDP in 2009.

  5. The source of the GDP per person, Literacy rate, Public spending on education, Number of listed domestic companies, Market capitalization, Turnover ratio is World Bank; www.databank.worldbank.org.

  6. For details concerning the information made public by the PCEEC stock exchanges, see “Appendix”. The quality of the data is acceptable for some stock exchanges, but relatively poor for others. For this reason, the number of tests performed in different studies, including this one, varies from country to country.

  7. Symptomatically, the number of listed companies tends to decrease in most countries, due to the elimination of the companies which are not traded.

  8. Tabak and Lima (2009) apply variance ratio test in order to test the random walk hypothesis for the Brazilian exchange rate.

  9. It is possible that some investors are able to negotiate a level of the trading fee lower that 1 %, thus reaching an abnormal return. However, we considered that the probability of this happening is low.

  10. The Agency for Rating and Estimation Estimator-VM (Agenţia de Rating şi Estimare Estimator-VM SRL, http://www.evm.md.

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Acknowledgments

This work was supported by National Council for Scientific Research—Executive Unit for Financing Higher Education, Research, Development and Innovation (CNCS-UEFISCDI), project number PN II-IDEI-1820/2008. The authors would like to thank EWGFM-50 Meeting (Rome) participants for very useful comments and suggestions. Also, the authors wish to thank Rita D’Ecclesia (the guest editor), two anonymous referees, Dragoş Ştefan Oprea, Daniel Traian Pele, Andreea Semenescu, Rodica Timotin, and Alexandru Todea for their valuable comments. The remaining errors are ours.

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  1. Department of Finance, Bucharest University of Economic Studies, Bucharest, Romania

    Victor Dragotă & Elena Valentina Ţilică

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  1. Victor Dragotă
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Correspondence to Victor Dragotă.

Appendix

Appendix

See Table 9.

Table 9 Information provided by the stock exchanges in Post Communist East-European Countries
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Dragotă, V., Ţilică, E.V. Market efficiency of the Post Communist East European stock markets. Cent Eur J Oper Res 22, 307–337 (2014). https://doi.org/10.1007/s10100-013-0315-6

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