Semi-strong Form Market Efficiency in Stock Markets with Low Levels of Trading Activity: Evidence from Stock Price Reaction to Major National and International Events

Abstract

This study uses the event study methodology to explore semi-strong form market efficiency in the context of low levels of trading activity. Covering six frontier stock markets, it investigates stock price reaction to major national news events that include natural disasters, parliamentary elections and credit rating reviews and the international events such as international terrorist incidents, major events surrounding the 2007/2008 sub-prime mortgage crisis and the United Kingdom’s referendum on membership in the European Union (Brexit). The results of the event studies, which feature a correction for low levels of trading activity, show that in sharp contrast with more actively traded markets, stock prices on markets with relatively low levels of trading activity did not react to the vast majority of major news events, and only tended to react to rare events with major consequences. Usually, where stock prices reacted to a news event, the reaction was significantly delayed, which is inconsistent with semi-strong form market efficiency. The implication is that low levels of trading activity may be associated with semi-strong form inefficiency, and stock prices in such markets may not fully reflect all relevant available information, and may be of limited value to a variety of decision-makers.