Informational efficiency of European equity markets

Abstract

A technique developed by Granger (1969) (Granger causality) is used to determine the informational efficiency of the following eight European equity markets: Amsterdam, Frankfurt, Paris, Dublin, Milan, Brussels, Copenhagen and London from January 1980 to December 1989. Share prices should react instantaneously to new information, whereas real economic variables, such as industrial volume and unemployment rates may take longer to adjust. Granger causality may be used to determine whether changes and volatility in share price indices lead or are led by changes in industrial volume and unemployment rates. If markets are informationally efficient the share price variables should lead the real economic variables. This methodology was previously employed by Huang and Kracaw (1984) based on US data, and Kamarotou and O'Hanlon (1989) based on UK, US, Japanese and Canadian data. There was little evidence to suggest that either share price variables lead real economic variables, or vice versa. This is contrary to the results of the studies of Huang and Kracaw and Kamarotou and O'Hanlon where share price variables were generally found to lead real economic variables.