Stock Market Efficiency in South Eastern Europe: Testing Return Predictability and Calendar Effects

Stock Market Efficiency in South Eastern Europe: Testing Return Predictability and Calendar Effects

Vladimir Filipovski (Saints Cyril and Methodius University, Macedonia) and Dragan Tevdovski (Saints Cyril and Methodius University, Macedonia)
Copyright: © 2018 |Pages: 24
DOI: 10.4018/978-1-5225-4026-7.ch011

Abstract

The purpose of this chapter is to empirically test the informational efficiency and to examine the presence of the calendar effects in 10 South Eastern European (SEE) stock markets' daily returns during the period 2007–2014. The authors use variance ratio test for exploration of random walk hypothesis. Regarding the calendar effects, the authors focus on the day-of-the-week effect, the half-month effect, and the turn-of-the-month effect. The existence of each calendar effect is analyzed by applying regression models with dummy variables for the effects in the mean returns and GARCH (1,1) models with dummy variables for the effects in the volatility of returns. The results indicate that the day-of-the-week effects in both mean and volatility are present in nine SEE stock markets. Contrary, the half-month effect in mean returns is present only in one, while half-month effect in volatility is present in five SEE stock markets. The turn-of-the- month effect in mean returns is present in six, while the turn-of-the-month effect in volatility is present in all 10 SEE stock markets.
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Background

In its weak form, informational efficiency hypothesis in a sense of Fama (1970, 1991) and Roberts (1967) states that subsequent changes in stock price are unpredictable based on information content of historic prices, since all information contained in price history is fully and instantaneously reflected in current stock price. The unpredictability of stock prices may be thought to imply that the stock price dynamics is generated by some form of a random walk process. Smith (2012) and Dyakova and Smith (2013) examined this hypothesis using variance ratio tests within the emerging European stock markets. They found a wide variability of the degree of return predictability among those markets.

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