Annals of the University of Oradea: Economic Science (Jul 2016)
EUROPEAN INTEGRATION AND CAPITAL MARKET EFFICIENCY IN CEE COUNTRIES
Abstract
The European Integration process involves radical changes into the inner-workings of the financial system of a country. From higher volumes of foreign direct investments to the development of the banking system or capital markets the European Integration process can ultimately lead to a better allocation of resources across the entire economy. This paper examines if the European Union Integration process increased the capital market efficiency in Bulgaria, Czech Republic, Poland, Romania, Slovakia and Hungary. We use two distinct samples of data in order to test the weak form of market efficiency: an ex-ante EU sample made up from all the data available up until joining the European Union, and an ex-post EU sample made up from all the data from joining the European Union up until March 2016. We employ a wide array of statistical tools for testing market efficiency such as: autocorrelation test, runs test, unit root test, and four variance ratios tests, performed on the daily return of the most important stock indices in the selected markets. While our results indicate that neither of our analyzed markets follows strictly the random walk model in both ex-ante and ex-post samples, we find evidence that after joining the European Union market efficiency increased in certain countries. We find in the ex-ante sample that only the Slovakian capital market exhibited signs of efficiency according to the autocorrelation, runs and variance ratio tests. Meanwhile, in the ex-post samples we find partial market efficiency in Hungary, Slovakia, Poland, Czech Republic and Romania in the variance ratio tests, while the autocorrelation test provided additional evidence for Bulgaria and the runs test for Slovakia. This suggests, that joining the European Union was not the decisive factor in improving market efficiency in Central and Eastern European capital markets, despite the potential positive effect of joining the EU on information efficiency. Thus, we can still use historical data in order to predict future price movements in CEE capital markets.
