Empirical Testing of the Response of Czech Stock Market to Downgrades of Greek Credit Rating in the Light of the Efficient Market Hypothesis

Petr Seďa,María De Los Baños García-Moreno García,Juan Antonio Jimber Del Río

doi:10.5817/fai2018-1-4

Petr Seďa, María De Los Baños García-Moreno García + Show 1 more

Open Access

https://doi.org/10.5817/fai2018-1-4

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Abstract

Empirical testing of the linkages between macroeconomic news and asset price movements in terms of response to released macroeconomic information have been a subject of many investigations using different testing methods. The objective of this paper is to study the impact of announcements of Greek credit rating downgrades on the prices of the most liquid assets quoted in the Czech stock market. This issue is tightly related to semi-strong form of the efficient market hypothesis, which is one of possible analytical approaches when analyzing behaviour of assets in financial markets. The reaction of the Czech stock market is assessed in relation to seven announcements of Moody´s rating agency regarding changes of credit rating of Greek government bonds in the period 2009–2012. For the purpose of this paper, the event study methodology is applied. The basic idea of this statistical method is to determine values of abnormal returns, which can be defined as a difference between actual and equilibrium returns. In order to calculate equilibrium returns, the Capital Asset Pricing Model (CAPM) is used. The differences between actual and equilibrium returns are then verified with a help of selected nonparametric statistical tests. Namely, the exact sign test and the Wilcoxon signed-rank test are utilized. Based on results of nonparametric statistical tests, the null hypothesis of information efficiency of the Czech stock market is conclusively rejected.

Highlights

The knowledge of possible impact of macroeconomic news on stock prices is important when assessing stock market efficiency
When testing the response of the Czech stock market to changes of Greek credit rating in the light of the efficient market hypothesis, the values of abnormal stock returns of all companies included in PX index in the event window are compared with zero abnormal returns that are considered a hallmark of the efficient market
The adjustment was relatively slow as the Czech market reacted significantly with a delay (+ 7–11 days). Another explanation is that negative values of average abnormal returns were caused by other fundamental factors and news releases about changes in Greek credit rating were not significant in the Czech stock market

Summary

Introduction

The knowledge of possible impact of macroeconomic news on stock prices is important when assessing stock market efficiency. The impact of macroeconomic information on equity prices for assessment of stock market efficiency and possible forecasting of stock market reactions have received a considerable attention in academic literature (Gurgul and Wójtowicz, 2015). The issue of testing the response of stock markets to announcement of macroeconomic news is very topical especially if we consider the recent global financial crisis. The global financial crisis and subsequent debt crisis significantly hit stock markets worldwide. The Czech Republic, an export-oriented economy with substantial reliance on foreign capital, was not an exception. The fund withdrawal led by foreign investors in the Czech stock market exacerbated volatility in stock market and decline of the whole market by more than 60% (Seďa, 2012)

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