Volatility and liquidity in Eastern Europe financial markets under efficiency and transparency conditions

Abstract

ABSTRACT. Following the consequences of the global financial crises, transparency and efficiency conditions of a local economic system have become important remedies for restoring of financial markets. This study provides measure of transparency and efficiency with correlation to liquidity and volatility and is taking into account the stock price reaction of emerging financial stock markets of Eastern Europe area and Turkey. We find that observed countries don't fully answer the expected sign of transparency, liquidity and risk measure, which meets the innovation from previous works (Berglof, Pajuste, 2005). It raises doubts concerning functioning of legal basement in these countries and affects the decisions about investments. In line with previous research (Ivanov, Lomev and Bogdanova, 2012) our findings show that these countries don't prove to have certain transparency expectations, which could result in a limited access to market information and in a decrease of market efficiency.Keywords: Financial Crisis, Risk, Liquidity, Volatility, Emerging Market, Eastern Europe.JEL Classification : G010, G23, G24(ProQuest: ... denotes formulae omitted.)IntroductionCountries with emerging markets are trying to rebuild their economies according to developed market models and are becoming more attractive for investing and trading. According to Miyajima and Shim (2014) the total amount of Asset Under Management (AUM) by the largest 500 AMCs doubled from $35 trillion in 2002 to almost $70 trillion in 2012, more specifically, after Leham Brothers, the total AUM of EME equity and bond dedicated funds increased from $900 billion in October 2007 to $1.4 trillion in May 2014. However, emerging markets of Eastern Europe experienced influences of financial crises dramatically. Injured by consequences of financial crises then others. According to ECB (2010) in Europe, the impact of the crisis varied across the countries (also varied the speed and the timing at which countries were affected) and coming from domestic demand, dependence from FDI, fiscal policy and external imbalances. Among the Eastern Europe countries, Poland has weathered the crisis relatively well, unlike the Baltic countries, Romania and Bulgaria.When talking about the GDP growth (annual %), all observed countries showed a sharp reduction of this index in 2009, especially Ukraine, Turkey, Romania and Lithuania. In the end of the second wave of financial crises (2012), such countries like Estonia, Latvia and Lithuania demonstrated the highest GDP growth among the observed group. However, there are negative meanings of GDP growth in Czech Republic and Hungary, while other countries reduced their GDP down to the minimum but still positive meaning. Moreover, it led to a limited role of local firms in the efficient resource allocation in these countries. It is worth of saying that Eastern European emerging markets are very young and weak, hence, they are still trying to reach a decent level of efficiency, which is a key factor for investor's decisions. Eastern European markets are well-known for their lack of transparency and high level of corruption. However, exactly better transparency increases investor's desire to work with a certain country.According to recent studies (Barth (2013), Francis and Huang (2009), Lang (2012), Jahanshad (2013)), transparency is meant to improve liquidity which in turn is crucial to deal with large quantities of securities very fast and with minimum costs. Moreover, timing of liquidity of Eastern European markets is very important due to possible illiquidity of stocks where they can become expensive to sell at the exact time suitable for investor. Liquidity uncertainty reflects in liquidity volatility, liquidity skewness, and extreme liquidity events which bring a negative image of a company and it reflects also on the whole local financial markets (Barth (2013), Lang (2011), Lang (2012)).We agree with previous studies (Ang, Ciccone (2000), Lin (2014), Millar (2005)), that transparency is a timely and reliable increase of certain information which is open for investors. …