Semi-strong form efficiencyin the baltic stock markets under changing economic situation

Abstract

Despite the fact that market operators try to enhance the liąuidity and efficiency of emerging markets, they are still less liąuid and efficient. Hovvever, market efficiency is a relative concept. Some recent researches proved that market efficiency varies between the markets and over time as well as it is influenced by economic situation. These reasons encouraged testing semi-strong form efficiency in the Baltic stock markets over a relatively long period (2000-2016) and to identify investors' behaviour under changing economic situation. The research employed event study methodology - Patell's, cross-sectional model and cumulative abnormal return tests. In order to check the robustness of the assessment of the difference betvveen the levels of efficiency or inefficiency in both sub-periods in the Baltic stock markets, t-test was applied. The chosen research period of 2000-2016 was divided into two sub-periods based on changes of OMX Baltic Benchmark index: January 2000 - March 2009 and April 2009 - December 2016. The research results showed that Baltic stock markets were not efficient in semi-strong form in neither of the sub-periods. The proposition, that thin stock markets are not efficient was confirmed, allowing investors in the Baltic stock markets to earn abnormal returns. In the second sub-period the average abnormal returns increased in all analysed markets, potentially due to increased distrust and precaution of investors. Nevertheless, significance of the difference betvveen the levels of inefficiency in both sub-periods was partly approved. Generally, it was determined that financial crisis caused variations in semi-strong form market inefficiency betvveen Baltic stock markets. Hovvever, these variations differed in each investigated market. This research provides the insights on possible actions of domestic investors in stock markets based on economic situation.