Financial Crisis, Ownership Effect and Investors Sentiment: Empirical Evidence from the Banking Sector in Greece

Abstract

1. Introduction According to the Efficient Market Hypothesis (EMH), Fama (1970), (1976), asset prices reflect fully and instantaneously all relevant available information in a rational, i.e. in accordance with economic theory, manner and factors not linked with economic theory, like investors sentiment, should not affect asset prices. In an efficient market, past information is of no use in predicting profitably future asset returns, since it has been already fully reflected on asset prices by a number of competing, profit maximizing investors. An efficient market should react only to new information, but since this is unpredictable by definition, asset price changes or asset returns cannot be predicted. Thus, the empirical research for market efficiency investigates if there is past available information which can help to predict future returns profitably, but also investigates if non economic factors like investors' psychology influence asset prices. In this study we will examine the stock price and trading volume behaviour of the banking sector in Greece, before and during the recent financial crisis which started in 2008. Analytically, we will examine the possibility of causal relationships between stock returns and stock returns and trading volume. The existence of such dynamics may give support to the view that asset prices during the crisis were heavily influenced by psychological factors and not only by negative news. We chose the banking sector because is representative for the Greek market but also it is preferable for investing by the majority of the institutional investors, both domestic and foreigner; and in the international literature there is growing evidence that institutional investors may herd due to psychological reasons opposite to the prediction of the Efficient Market Hypothesis, Choe, Kho and Stulz (1999), Kim and Wei (2002), Bowe and Domuta (2004), Pucket and Yan (2007), Tan, Chiang, Mason and Nelling (2008). In our study, section two (2), presents the relevant theory, section three (3), presents the data sets and the methodology, section four (4) presents data and the empirical results and finally, section five (5) concludes. 2. Theoretical Framework and Related Literature Under the Efficient Market Hypothesis the Fair Game [2] model holds for stock price changes and consequently for stock returns: E[[P.sub.t] - ([P.sup.*.sub.t]/[I.sub.t-1])] = 0 or E([r.sub.t]/[I.sub.t-1]) = 0 (1) where [I.sub.t-1] is the information set available at time t-1, [P.sub.t] is the actual price at time t, [P.sup.*.sub.t] is the expected price which is based on the information set [I.sub.t-1], and [P.sub.t] - [P.sup.*.sub.t] is the forecast error which is uncorrelated with variables in the information set [I.sub.t-1]. Similarly, [r.sub.t] is the stock return which is uncorrelated with variables in the information set [I.sub.t-1] Le Roy (1989, 1990). According to Samuelson (1965), under the assumption of a non zero equilibrium return and assuming that agents have constant and common time preferences, common probabilities and are risk neutral, then if all assets are to be held willingly, as must be the case for equilibrium, all should therefore earn the same expected rate of return, equal to the equilibrium return. Fama (1970), rejected the hypothesis that returns themselves are a Fair Game and proposed the following definition of market efficiency, which makes the EMH a joint hypothesis: [Z.sub.t] = [r.sub.t] - E([r.sub.t]/[I.sub.t-1]) (2) with: E([z.sub.t]) = E[[r.sub.t] - E([r.sub.t]/[I.sub.t-1])] = 0 (3) In economic terms [z.sub.t] is the return at time t, in excess of the equilibrium expected return projected at time t, on the basis of the information set [I.sub.t-1]. With the additional assumption that the equilibrium return is constant through time [3], then returns themselves are uncorrelated with variables in past information sets. …