Semi-Strong Form Market Efficiency in Thinly Traded Markets: Evidence from Stock Price Reaction to Major National and International Events

25 Pages Posted: 30 Sep 2016

See all articles by C Justin Robinson

C Justin Robinson

University of West Indies, Cave Hill

Prosper Bangwayo-Skeete

University of the West Indies (Cave Hill)

Date Written: September 09, 2016

Abstract

This study uses the event study methodology adjusted for thin trading, to explore semi-strong form market efficiency in the context of thin trading. The paper does this by investigating stock price reaction to major national and international news events in six frontier stock markets, which are among the least active in the world. The national events studied include natural disasters, parliamentary elections and credit rating reviews, while the international events studied include international terrorist incidents, major events surrounding the 2007/2008 sub-prime mortgage crisis and the United Kingdom’s referendum on membership in the European Union (Brexit) The results show that in sharp contrast with more active traded markets, stock prices on these thinly traded markets did not react to the vast majority of major news events, and only tended to react to rare events with major consequences. In almost all cases where there was a stock price reaction to a news event, the reaction was significantly delayed, which is inconsistent with semi-strong form market efficiency, The implication is that thin trading may be associated with semi-strong form inefficient markets, and as such stock prices in thinly traded markets prices may not fully reflect all relevant available information, and may be of limited value to a variety of decision makers.

Keywords: thin trading, frontier stock markets, market efficiency, developing countries, Caribbean.

JEL Classification: G

Suggested Citation

Robinson, C Justin and Bangwayo-Skeete, Prosper, Semi-Strong Form Market Efficiency in Thinly Traded Markets: Evidence from Stock Price Reaction to Major National and International Events (September 09, 2016). Available at SSRN: https://ssrn.com/abstract=2845385 or http://dx.doi.org/10.2139/ssrn.2845385

C Justin Robinson (Contact Author)

University of West Indies, Cave Hill ( email )

Cave Hill
Barbados

Prosper Bangwayo-Skeete

University of the West Indies (Cave Hill) ( email )

Cave Hill
Barbados

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