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Efficiency of Financial Markets in Transition: The Case of Macroeconomic Releases

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  • Richard Podpiera

Abstract

This paper contributes to the discussion on the efficiency of newly emerged financial markets in transition economies. We use data on one of the most developed financial markets in transition, the Czech Republic, to investigate financial market efficiency by examining the reaction to macroeconomic releases. Direct measure of market expectations, that is, survey data, is used to form a proxy for market expectations. The reactions of interest rates, bond yields, exchange rates, and the stock market index are explored. We found that, despite the fact that the survey data appear to reasonably approximate rational expectations, the Czech market lacks basic efficiency properties. It reacts to the expected part of the news announcement, and the adjustment is stretched over a period of several days. In the case of CPI, we found evidence suggesting that the efficiency of the market improves over time.

Suggested Citation

  • Richard Podpiera, 2000. "Efficiency of Financial Markets in Transition: The Case of Macroeconomic Releases," CERGE-EI Working Papers wp156, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp156
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    References listed on IDEAS

    as
    1. Deaves, Richard, 1990. "Money Supply Announcements and Market Reactions in an Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 154-164, May.
    2. Richard Podpiera, 2000. "Czech Financial Market Efficiency in Light of Recent Interest Rate Cuts," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 50(5), pages 270-282, May.
    3. Ederington, Louis H. & Lee, Jae Ha, 1995. "The Short-Run Dynamics of the Price Adjustment to New Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(1), pages 117-134, March.
    4. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
    5. Amihud, Yakov, 1996. "Unexpected Inflation and Stock Returns Revisited--Evidence from Israel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 22-33, February.
    6. Aggarwal, Raj & Mohanty, Sunil & Song, Frank, 1995. "Are Survey Forecasts of Macroeconomic Variables Rational?," The Journal of Business, University of Chicago Press, vol. 68(1), pages 99-119, January.
    7. Almeida, Alvaro & Goodhart, Charles & Payne, Richard, 1998. "The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 383-408, September.
    8. Mahdi Sadeghi, 1992. "Stock Market Response to Unexpected Macroeconomic News: The Australian Evidence," IMF Working Papers 1992/061, International Monetary Fund.
    9. Michael Smirlock, 1986. "Inflation announcements and financial market reaction: evidence from the long-term bond market," Working Papers 86-6, Federal Reserve Bank of Philadelphia.
    10. Smirlock, Michael, 1986. "Inflation Announcements and Financial Market Reaction: Evidence from the Long-term Bond Market," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 329-333, May.
    11. Hoffman, Dennis L & Schlagenhauf, Don E, 1985. "The Impact of News and Alternative Theories of Exchange Rate Determination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 328-346, August.
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    Cited by:

    1. Christian Aubin & Jean-Pierre Berdot & Daniel Goyeau & Jacques Léonard, 2005. "Quelle convergence financière pour les pecos ?. Une analyse économétrique de l'évolution des marchés d'actions (1998-2003)," Revue économique, Presses de Sciences-Po, vol. 56(1), pages 147-169.
    2. Mynhardt, H. R. & Plastun, Alex & Makarenko, Inna, 2014. "Behavior of Financial Markets Efficiency During the Financial Market Crisis: 2007-2009," MPRA Paper 58942, University Library of Munich, Germany.
    3. Alexandr Èerný & Michal Koblas, 2008. "Stock Market Integration and the Speed of Information Transmission," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(01-02), pages 2-20, January.

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    More about this item

    Keywords

    market efficiency; emerging markets; market response; macroeconomic release;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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