Can a Stock Index Be Less Efficient Than Underlying Shares? An Analysis Using Malta Stock Exchange Data

Camilleri, Silvio John (2005): Can a Stock Index Be Less Efficient Than Underlying Shares? An Analysis Using Malta Stock Exchange Data. Published in: The FEMA Research Bulletin , Vol. 1, No. 1 (1 January 2005): pp. 29-41.

Abstract

Researchers often assume that stock market indices are the best possible yardstick in terms of market efficiency. The paper investigates this concept using data from the Malta Stock Exchange (MSE). The fact that a significant number of MSE shares do not trade everyday, may imply that the most liquid shares on this exchange are more efficient than the market index, whose value is dependent on shares of varying liquidity levels – including the less liquid ones. The paper applies various tests to compare the pricing efficiency of the MSE Index to that of the most liquid share quoted on the exchange. It is found that the MSE Index is still more efficient than the latter share.

• Item Type: MPRA Paper
• Language: English
• Keywords: Malta Stock Exchange, Market Efficiency, Non-Synchronous Trading, Stock Markets.
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

References

Amihud, Y., H. Mendelson, and B. Lauterbach, 1997, Market Microstructure and Securities Values: Evidence from the Tel Aviv Stock Exchange, Journal of Financial Economics, 45, 365-390.

Atchison, M.D., K.C. Butler, and R.R. Simonds, 1987, Nonsynchronous Security Trading and Market Index Autocorrelation, The Journal of Finance, 42, 111-118.

Azzopardi, P.V., and S.J. Camilleri, 2003, The Relevance of Short Sales to the Maltese Stock Market, Bank Of Valletta Review, 28, 1-17, Autumn.

Baek, E., and W. Brock, 1992, A General Test for Nonlinear Granger Causality: Bivariate Model, Working Paper, Iowa State University and University of Wisconsin-Madison.

Bollerslev, T., and R.J. Hodrick, 1995, Financial Market Efficiency Tests, in Handbook of Applied Econometrics, (eds. M.H. Pesaran and M.R. Wickins). Cambridge, UK: Basil Blackwell, Publishers.

Boudoukh, J., M. Richardson, and R. Whitelaw, 1994, A Tale of Three Schools: Insights on Autocorrelations of Short-Horizon Returns, Review of Financial Studies, 7, 539-573.

Brown, S.J. and J.B. Warner, 1980, Measuring Security Price Performance, Journal of Financial Economics, 8, 205-258.

Cable, J., and K. Holland, 1999, Modelling Normal Returns In Event Studies: A Model-Selection Approach And Pilot Study, The European Journal Of Finance, 5, 331–341.

Camilleri, S.J., and C.J. Green, 2014, Stock Market Predictability: Non-Synchronous Trading or Inefficient Markets? Evidence from the National Stock Exchange of India, Studies in Economics and Finance, 31(4), 354-370.

Campbell, J.Y., A.W. Lo, and A.C. MacKinlay, 1997, The Econometrics of Financial Markets, Princeton, NJ: Princeton University Press.

Cohen, K., S. Maier, R. Schwartz, and D. Whitcomb, 1979, On the Existence of Serial Correlation in an Efficient Securities Market, TIMS Studies in the Management Sciences, 11, 151-168.

Dacorogna, M., R. Gençay, U. Müller, R. Olsen, O. Pictet, 2001, An Introduction to High-Frequency Finance, San Diego CA, Academic Press.

Day, T.E., and P. Wang, 2002, Dividends, Nonsynchronous Prices, and the Returns from trading the Dow Jones Industrial Average, Journal of Empirical Finance, 9, 431-454.

Dimson, E., and M. Mussavian, 1998, A Brief History of Market Efficiency, European Financial Management, 4(1), 91-103.

Fisher, L., 1966, Some New Stock Market Indexes, Journal of Business, 39, 191-225.

Granger, C.W.J., 1969, Investigating Causal Relations By Econometric Methods And Cross Spectral Methods, Econometrica, 37(3), 424-438.

Harris, L., 1991, Stock Price Clustering and Discreteness, The Review of Financial Studies, 4(3), 389-415, Fall.

Kadlec, G.B., and D.M. Patterson, 1999, A Transactions Data Analysis of Nonsynchronous Trading, The Review of Financial Studies, 12(3), 609-630, Fall.

Lo, A.W., and A.C. MacKinlay, 1990, When Are Contrarian Profits Due To Stock Market Overreaction, The Review of Financial Studies, 3(2), 175-205.

MacKinlay, A.C., 1997, Event Studies in Economics and Finance, Journal of Economic Literature, 35, 13-39.

Niarchos, N.A. and C.A. Alexakis, 1998, Stock Market Prices, ‘Causality’ And Efficiency: Evidence From The Athens Stock Exchange, Applied Financial Economics, 8, 167-174.

Scholes, M., and J. Williams, 1977, Estimating Betas From Nonsynchronous Data, Journal of Financial Economics, 5, 309-327.