Academic journal article Global Journal of Business Research

Efficiency of the Eastern Caribbean Securities Exchange

Academic journal article Global Journal of Business Research

Efficiency of the Eastern Caribbean Securities Exchange

Article excerpt

ABSTRACT

This study examines the weak-form efficiency of the Eastern Caribbean Securities Exchange, which opened on October 19, 2001, by conducting tests for the day-ofthe-week effect on the individual stocks listed on the Eastern Caribbean Securities Exchange. Weak-form efficiency means that current security prices reflect all past public information including past prices, rates of return, and trading volume data. Given the enormous amounts being invested in emerging markets, those countries that can maintain efficient markets may attract billions of dollars of capital to the businesses in their countries. This paper is the first to test firms listed on the Eastern Caribbean Securities Exchange for weak-form efficiency. The results of evaluating Monday returns, Friday returns and other day of the week returns are consistent with weak-form efficiency, while the results of runs tests find some evidence of weak-form inefficiency in the securities trading on the Eastern Caribbean Securities Exchange.

JEL: G150

KEYWORDS: Market Efficiency, ECSE

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Developing countries with their own stock exchanges have great interest in the efficiency of their markets. One reason for a developing country to have an exchange is to make it easier for businesses located in the country to attract the capital they need to grow, and international investors have shown themselves to be hungry for emerging market growth opportunities. In 2010, for example, U.S. investors put more than $60 billion into emerging market equity funds while also pulling $74 billion out of developed market stock funds (Steverman 2010). In 2009 emerging market investment captured 26 percent of global equity investment versus only seven percent in 2004 (Choi 2009). A recent article in the Financial Times suggests this growth may continue, "For many people the future of investing can be summed up in two words: emerging markets" (Oakley and Meyer 2009).

One concern of investors in emerging markets, however, is being taken advantage of in a market perceived to be stacked against "outsiders". Given the enormous amounts being invested in emerging markets, those countries that can maintain efficient markets may attract billions of dollars of capital to the businesses in their countries. Thus, studies of emerging market efficiency have been of great interest to academics, regulators, and practitioners alike. The most fundamental level of efficiency, weak-form efficiency, requires the market price of a security to reflect all publicly available historical information. If a market is weak-form efficient, it is not possible to earn excess returns using trading rules or patterns identified through the study of historical stock prices. As Akdeniz (2000) notes: "it is evident that much has to be done to understand the nature of stock returns in emerging markets." Although there have been studies of the efficiency of many emerging markets, including, for example the Jamaican, Botswana, and the Bahrain exchanges (Robinson 2005, Mollah 2007, and Asiri 2008), there has never been a published study of the efficiency of the Eastern Caribbean Securities Exchange (ECSE).

The Eastern Caribbean Securities Exchange (ESCE) was established by the Eastern Caribbean Central Bank to serve the eight countries that form the Eastern Caribbean territory: Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. The exchange began on October 19, 2001 with the trade of its first listed stock, Bank of Nevis, and is open to companies in the Caribbean region. As of December 2012, the U.S. dollardenominated ECSE had listed twelve more companies from countries including Barbados, Dominica, Grenada, Jamaica, St. Kitts & Nevis, St. Lucia, and Trinidad.

This study is the first to test the efficiency of trading in the stocks listed on the ECSE. …

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