Testing efficient market hypothesis in developing Eastern European countries

Saša Tokić,Anita Radman Peša,Berislav Bolfek

doi:10.21511/imfi.15(2).2018.25

Saša Tokić, Anita Radman Peša + Show 1 more

Open Access

https://doi.org/10.21511/imfi.15(2).2018.25

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Abstract

This paper analyzes financial markets in four developing countries (Croatia, Serbia, Slovenia, Slovakia) using daily returns of their respective stock market indices from January 1, 2006 till December 31, 2016, timeframe which was rarely analyzed. Analysis was conducted by various statistical tests, more precisely serial correlation test, runs test, Augmented Dickey-Fuller test, unit root test, variance ratio test and test of January effect. Results suggest that all analyzed indices, except BelexLine (Serbia), confirm weak form of efficient market hypothesis, while the results on the index BelexLine are mixed and it can be concluded that it does not follow weak form of efficient market hypothesis. Given these results, it can be said that not only passive approach to portfolio management is more appropriate on all indices, except BelexLine, but also additional test and more complex models are necessary in order to confirm this conclusion.

Highlights

The index Belex[15] was not efficient, while index BelexLine turned out to be efficient. They concluded that, since there were no consistencies in This paper focuses on the market efficiency in sethe results, efficient market hypothesis can be re- lected countries, testing weak form of jected, meaning that the Serbian stock market was efficient market hypothesis on the daily returns of not following a random walk
It is believed that newer markets with lower market capitalization are often inefficient and at least partially reject efficient market hypothesis in its weak form, which suggests that it is possible to achieve above market returns if the transaction costs and slippage allow to exploit these inefficiencies
This paper focused on the weak form of the efficient market hypothesis using daily index returns in four developing European countries, Croatia, Slovenia, Serbia and Slovakia

Summary

INTRODUCTION

One of the most discussed topics between academics and participants in the financial industry is the one of market efficiency, ever since Fama (1965) laid the foundations of the efficient market hypothesis whose basic premise is that future prices cannot be predicted using only the past prices, or in other words, the changes in the indices are random and gains are and evenly distributed. This paper analyzes financial markets in the four developing European states based on the daily returns of their biggest respective indices in the timeframe from January 1, 2006 till December 31, 2016, which is a timeframe, which is not well covered in current research. Paper focuses on financial markets in Croatia, Slovenia, Serbia and Slovakia, which are all transitioning countries in their various states of transition. Because of their developing status, it can be expected, based on the previous literature, that at least some of the analyzed markets will show a certain amount of inefficiencies, i.e. that they will reject efficient market hypothesis

EMPIRICAL ANALYSIS

AND DISCUSSION

DISCUSSION

CONCLUSION