Random-Walk and Efficiency Tests of Central European Equity Markets

Abstract

The existence of weak-form efficiency in the equity markets of the three main Central European transition economies (the Czech Republic, Hungary, and Poland) is examined for the period July 1995 through September 2000, using weekly Investable and Comprehensive indexes developed by the International Finance Corporation. Several different approaches are used. Univariate and multivariate tests provide some evidence that stock prices in these exchanges exhibit a random walk, which would support weak-form efficiency. This differs in some cases from studies using data for the initial years of these markets. The variance ratio test of Lo and MacKinlay (1988) yields somewhat mixed results concerning the random walk properties of the indexes. A model-comparison test compares forecasts from a NAIVE model with ARIMA and GARCH alternatives. Results from the model-comparison approach are consistent in rejecting the random-walk hypothesis for the three Central European equity markets.