IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v49y2014ipbp299-318.html
   My bibliography  Save this article

Market efficiency during the global financial crisis: Empirical evidence from European banks

Author

Listed:
  • Choudhry, Taufiq
  • Jayasekera, Ranadeva

Abstract

This paper empirically investigates the asymmetric effect of news on the time-varying beta of selected banks from seven European countries during the current crisis period and also during the pre-crisis period. The paper applies daily data from thirteen large banks from France, Germany, Greece, Ireland, Italy, Portugal and Spain. The sample size ranges from 2002 to 2013 and includes the current global financial crisis (2007–2013). The BEKK GARCH model is first employed to estimate the time-varying beta and then linear regression is applied to investigate the asymmetric effect of news on the beta. The asymmetric effects are investigated based on both market and non-market shocks. Results show that some evidence of market efficiency can be witnessed via non-market shocks, however the market shocks indicate that the European banks foster a significant amount of uncertainty leading to asset mispricing. Results also show a clear rift in terms of quality of results between France and Germany taken as a group and the rest of the countries under study. These results shed light on the level of market efficiency and hedging strategies.

Suggested Citation

  • Choudhry, Taufiq & Jayasekera, Ranadeva, 2014. "Market efficiency during the global financial crisis: Empirical evidence from European banks," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 299-318.
    • Handle: RePEc:eee:jimfin:v:49:y:2014:i:pb:p:299-318
    DOI: 10.1016/j.jimonfin.2014.03.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560614000485
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2014.03.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:53:y:1998:i:6:p:1975-1999 is not listed on IDEAS
    2. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
    3. Lakonishok, Josef & Vermaelen, Theo, 1990. "Anomalous Price Behavior around Repurchase Tender Offers," Journal of Finance, American Finance Association, vol. 45(2), pages 455-477, June.
    4. Ball, Ray & Kothari, S. P., 1989. "Nonstationary expected returns : Implications for tests of market efficiency and serial correlation in returns," Journal of Financial Economics, Elsevier, vol. 25(1), pages 51-74, November.
    5. Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, August.
    6. Ikenberry, David L. & Rankine, Graeme & Stice, Earl K., 1996. "What Do Stock Splits Really Signal?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 357-375, September.
    7. Chris Brooks & Ólan T. Henry, 2002. "The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 487-507, December.
    8. repec:bla:jfinan:v:44:y:1989:i:5:p:1115-53 is not listed on IDEAS
    9. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    10. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    11. Taufiq Choudhry, 2002. "The Stochastic Structure of the Time–Varying Beta: Evidence from UK Companies," Manchester School, University of Manchester, vol. 70(6), pages 768-791, December.
    12. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    13. Timmermann, Allan & Granger, Clive W. J., 2004. "Efficient market hypothesis and forecasting," International Journal of Forecasting, Elsevier, vol. 20(1), pages 15-27.
    14. Bodurtha, James N, Jr & Mark, Nelson C, 1991. "Testing the CAPM with Time-Varying Risks and Returns," Journal of Finance, American Finance Association, vol. 46(4), pages 1485-1505, September.
    15. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 159-178.
    16. Ikenberry, David & Lakonishok, Josef, 1993. "Corporate Governance through the Proxy Contest: Evidence and Implications," The Journal of Business, University of Chicago Press, vol. 66(3), pages 405-435, July.
    17. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
    18. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    19. Michaely, Roni & Thaler, Richard H & Womack, Kent L, 1995. "Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?," Journal of Finance, American Finance Association, vol. 50(2), pages 573-608, June.
    20. Cusatis, Patrick J. & Miles, James A. & Woolridge, J. Randall, 1993. "Restructuring through spinoffs*1: The stock market evidence," Journal of Financial Economics, Elsevier, vol. 33(3), pages 293-311, June.
    21. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. "The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-1621, September.
    22. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    23. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    24. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    25. Bernard, Victor L. & Thomas, Jacob K., 1990. "Evidence that stock prices do not fully reflect the implications of current earnings for future earnings," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 305-340, December.
    26. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    27. Young-Hye Cho & Robert F. Engle, 1999. "Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks," NBER Working Papers 7330, National Bureau of Economic Research, Inc.
    28. Desai, Hemang & Jain, Prem C, 1997. "Long-Run Common Stock Returns following Stock Splits and Reverse Splits," The Journal of Business, University of Chicago Press, vol. 70(3), pages 409-433, July.
    29. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    30. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    31. De Bondt, Werner F M & Thaler, Richard H, 1989. "A Mean-Reverting Walk Down Wall Street," Journal of Economic Perspectives, American Economic Association, vol. 3(1), pages 189-202, Winter.
    32. K. Giannopoulos, 1995. "Estimating the time Varying Components of international stock markets' risk," The European Journal of Finance, Taylor & Francis Journals, vol. 1(2), pages 129-164.
    33. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
    34. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    35. Asquith, Paul, 1983. "Merger bids, uncertainty, and stockholder returns," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 51-83, April.
    36. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    37. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. "Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December.
    38. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
    39. Choudhry, Taufiq & Jayasekera, Ranadeva, 2012. "Comparison of efficiency characteristics between the banking sectors of US and UK during the global financial crisis of 2007–2011," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 106-116.
    40. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    41. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    42. repec:bla:manchs:v:70:y:2002:i:6:p:768-91 is not listed on IDEAS
    43. Dharan, Bala G & Ikenberry, David L, 1995. "The Long-Run Negative Drift of Post-listing Stock Returns," Journal of Finance, American Finance Association, vol. 50(5), pages 1547-1574, December.
    44. Chan, K C, 1988. "On the Contrarian Investment Strategy," The Journal of Business, University of Chicago Press, vol. 61(2), pages 147-163, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Costantini, Mauro & Sousa, Ricardo M., 2022. "What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality," Journal of International Money and Finance, Elsevier, vol. 122(C).
    2. Natalya Ketenci, 2015. "Capital mobility in the panel GMM framework: Evidence from EU members," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 12(1), pages 3-19, July.
    3. Mirzaei, Ali, 2019. "Market power among UAE banks: The 2008 financial crisis and its impact," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 56-66.
    4. Corbet, Shaen & Cumming, Douglas J. & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2022. "Have crisis-induced banking supports influenced European bank performance, resilience and price discovery?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    5. Nurboja, Bashkim & Košak, Marko, 2017. "Banking efficiency in South East Europe: Evidence for financial crises and the gap between new EU members and candidate countries," Economic Systems, Elsevier, vol. 41(1), pages 122-138.
    6. de Resende, Charlene C. & Pereira, Adriano C.M. & Cardoso, Rodrigo T.N. & de Magalhães, A.R. Bosco, 2017. "Investigating market efficiency through a forecasting model based on differential equations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 474(C), pages 199-212.
    7. Garcia, M.M. & Machado Pereira, A.C. & Acebal, J.L. & Bosco de Magalhães, A.R., 2020. "Forecast model for financial time series: An approach based on harmonic oscillators," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 549(C).
    8. Lindner, Thomas & Puck, Jonas, 2024. "Information distance: Conceptual development and empirical tests of a novel measure of cross-national distance," Journal of International Management, Elsevier, vol. 30(2).
    9. Pablo Gemar & German Gemar & Vanesa Guzman-Parra, 2019. "Modeling the Sustainability of Bank Profitability Using Partial Least Squares," Sustainability, MDPI, vol. 11(18), pages 1-13, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Taufiq Choudhry & Ranadeva Jayasekera, 2015. "Level of efficiency in the UK equity market: empirical study of the effects of the global financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 213-242, February.
    2. Choudhry, Taufiq & Jayasekera, Ranadeva, 2012. "Comparison of efficiency characteristics between the banking sectors of US and UK during the global financial crisis of 2007–2011," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 106-116.
    3. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    4. Dionysia Dionysiou, 2015. "Choosing Among Alternative Long-Run Event-Study Techniques," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 158-198, February.
    5. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    6. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 410-454, December.
    7. Luc Savard, 2010. "Scaling up infrastructure spending in the Philippines: A CGE top-down bottom-up microsimulation approach," International Journal of Microsimulation, International Microsimulation Association, vol. 3(1), pages 43-59.
    8. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    9. Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March.
    10. Young-Hye Cho & Robert F. Engle, 1999. "Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks," NBER Working Papers 7330, National Bureau of Economic Research, Inc.
    11. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021, January-A.
    12. Nam, Kiseok & Pyun, Chong Soo & Arize, Augustine C., 2002. "Asymmetric mean-reversion and contrarian profits: ANST-GARCH approach," Journal of Empirical Finance, Elsevier, vol. 9(5), pages 563-588, December.
    13. Erica X. N. Li & Dmitry Livdan & Lu Zhang, 2009. "Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4301-4334, November.
    14. Degiannakis, Stavros & Xekalaki, Evdokia, 2004. "Autoregressive Conditional Heteroskedasticity (ARCH) Models: A Review," MPRA Paper 80487, University Library of Munich, Germany.
    15. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, August.
    16. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    17. Wael Bousselmi & Patrick Sentis & Marc Willinger, 2018. "Impact of the Brexit vote announcement on long-run market performance," CEE-M Working Papers hal-01954920, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
    18. DePenya, Francisco J. & Gil-Alana, Luis A., 2007. "Serial correlation in the Spanish Stock Market," Global Finance Journal, Elsevier, vol. 18(1), pages 84-103.
    19. Fernando Rubio, 2005. "Estrategias Cuantitativas De Valor Y Retornos Por Accion De Largo," Finance 0503029, University Library of Munich, Germany.
    20. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.

    More about this item

    Keywords

    Asymmetric effect; Time-varying beta; BEKK; Market efficiency and asset mispricing; European banking industry;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:49:y:2014:i:pb:p:299-318. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.