Stock Exchange Mergers and Weak Form of Market Efficiency: The Case of Euronext Lisbon
34 Pages Posted: 3 Apr 2010
Date Written: March 4, 2010
We examine the impact of the stock exchange mergers on market efficiency using the Portuguese Stock Exchange (PSE) while evaluating the overall market efficiency of that market. We examine if daily stock returns on the Portuguese Stock Exchange (PSE) conform to a normal probability distribution, if market returns explain variation in daily stock returns, and if stock price changes represent a random walk against a review of efficiency of international markets. We also examine whether the merger of Bolsa de Valores de Lisboa e Porto (PSE) with Euronext in 2002 (that created Euronext Lisbon) improves the informational efficiency of the Portuguese Stock Market.
Our results show that daily stock returns don't follow a normal distribution. Time series of stock returns is stationary and it produces significant “runs”. Single factor market model explains only a small portion of daily stock returns and the returns time series is significantly serially correlated. After the stock exchanges mergers, daily stock returns follow even a less normal distribution compared to the pre-merger situation. The impact of the merger on the explanatory power of the market model and serial returns correlations is mixed. We find evidence of significant runs before and after the merger periods. Also we reject the hypothesis of non-stationary returns series before and after the merger periods.
Finally, we conclude that the stock market does not follow a random walk based upon variance ratio tests. After the merger, VR (q) ratio decreases in practically all the cases indicating that the post merger situation is worse in terms of deviation from the random walk hypothesis. Overall results indicate that the Portuguese Equity Market is inefficient in weak form implying that investors have an opportunity to earn abnormal returns though small in magnitude. There is no statistical evidence that the stock exchange mergers enhances the market efficiency.
Keywords: Stock exchange mergers, Random walk hypothesis, Market efficiency
JEL Classification: C12, C14, G14, G15
Suggested Citation: Suggested Citation