An analysis of derivative markets efficiency in emerging economies

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iv ABSTRACT

AN ANALYSIS OF DERIVATIVE MARKETS EFFICIENCY IN EMERGING ECONOMIES

DÖNMEZ, Mehmet Gürhan Business Administration

Supervisor: Ass. Prof. Ece Ceylan KARADAöLI August 2011, 86 pages

In this study, Efficient Market Hypothesis in weak form is applied to futures markets in European Emerging Economies, by testing whether the price series of these markets contain unit root. The hypothesis that futures market price index follow a random walk tested for Greece, Hungary, Poland, Russia and Turkey, using the linear unit root tests (ADF and PP), linear panel unit root test, nonlinear unit root test developed by Kapetanios et al. (2003) and nonlinear panel unit root test developed by Ucar and Omay (2009). The data is monthly and it was collected from DataStream. There are 70 monthly observations for each market between the period of September 2005 and June 2011. The results of ADF and PP show that all futures markets are weak form efficient. Nonlinear unit root test results indicate that Polish and Turkish futures markets are not weak form efficient. The findings of the linear panel unit root test show that this group when considered as a whole, are efficient in

v the weak form while the findings of the nonlinear panel unit root test indicates that they are inefficient as a group.

Keywords: Emerging Markets, Futures Market, Market Efficiency, Linear and Nonlinear Unit root, Panel Unit Root

v ÖZ

GELøùMEKTE OLAN EKONOMøLERDE TÜREV PøYASALARI ETKøNLøöø ANALøZø

DÖNMEZ, Mehmet Gürhan Yüksek Lisans, øúletme Yönetimi

Tez Yöneticisi: Yrd. Doç. Dr. Ece Ceylan KARADAöLI A÷ustos 2011, 86 sayfa

Bu çalıúmada, Avrupa’daki geliúmekte olan ekonomilerde vadeli piyasaların fiyat serilerinin birim kök içeren olup olmadı÷ını test etmek için zayıf formda Etkin Piyasa Hipotezi uygulanmıútır. Do÷rusal birim kök testleri (GDF ve PP), do÷rusal panel birim kök testi, Kapetanios ve di÷erleri (2003) tarafından geliútirilmiú do÷rusal olmayan birim kök testi ve Omay ve Ucar (2009) tarafından geliútirilmiú do÷rusal olmayan panel birim kök testi hipotezin vadeli piyasaların fiyat endekslerinin rassal yürüyüúü takip edip etmedi÷ini test etmek amacıyla Yunanistan, Macaristan, Polonya, Rusya ve Türkiye’de kullanılmıútır. Veriler aylık ve DataStream’den alınmıútır. Eylül 2005 ve Haziran 2011 arasında her piyasa için 70 aylık gözlem bulunmaktadır. GDF ve PP testlerinin sonuçları bütün piyasaların etkin oldu÷unu göstermektedir. Do÷rusal olmayan birim kök testi Polonya ve Türkiye piyasalarının etkin olmadı÷ını belirtmektedir. Ayrıca, do÷rusal panel birim kök testi bu grubun

v etkin oldu÷unu gösterirken, do÷rusal olmayan panel birim kök testi grup olarak bu ülkelerin etkin olmadı÷ını göstermektedir.

Anahtar Kelimeler: Geliúmekte Olan Piyasalar, Vadeli Piyasaları, Piyasa Etkinli÷i, Do÷rusal ve Do÷rusal olmayan Birim Kök, Panel Birim Kök

v ACKNOWLEDGMENTS

I would like to express my deepest gratitude to my supervisor Ass. Prof. Ece Ceylan KARADAöLI for her insight, guidance, suggestions, criticism, and encouragements throughout the research.

I also gratefully acknowledge Asc. Prof. Tolga OMAY for spare his valuable time and assistance in application of this study.

I am grateful to Prof. Dr. Hasan Iúın DENER for his able guidance with his knowledge and experience during my troubled times.

I would also like to thank Prof. Dr. Nahit TÖRE for his suggestions and comments.

I owe special thanks to Dr. Fatih AKCAN for his different perspective, suggestions and assistance.

Another special thanks to Asc. Prof. Tamer AKSOY for his ideas and suggestions.

I have to thanks to my family for their invaluable support.

Last but not least, thanks to Nurhan ÖZDAMAR and Sancar TANIùMAN for their assistance.

ix TABLE OF CONTENTS

STATEMENT OF NON PLAGIARISM………... iii

ABSTRACT………... iv

ÖZ……… v

ACKNOWLEDGEMENTS………... vi

TABLE OF CONTENTS……….. ………. vii

CHAPTERS: 1. INTRODUCTION………. 1

2. MARKET EFFICIENCY………... 6

2.1 Efficiency Concept……… 6

2.2 Efficiency Concept in Financial Markets……… ………. 7

2.2.1 Operational Efficiency……… ………. 7

2.2.2 Capital Allocation Efficiency………... 8

2.2.3 Informational Efficiency……….. 8

2.3 Efficient Market Hypothesis………. 9

2.3.1 History of Efficient Market Hypothesis………. 10

2.3.2 Efficient Market Assumptions……….... 12

2.3.3 Types of Efficient Market Hypothesis……….... 12

2.3.3.1 Weak Form of Market Efficiency………... 13

2.3.3.2 Semi-Strong Form of Market Efficiency……….... 14

v

2.3.4 Major Models Used in Testing Market Efficiency………... 16

2.3.4.1 Expected Return or “Fair Game” Models……….. 16

2.3.4.2 Submartingale Model………. 17

2.3.4.3 The Random Walk Model……….. 18

2.4 Opinions against Market Efficiency……….... 19

2.5 Evidence on Market Efficiency in Developed and Emerging Markets…... 22

2.5.1 Empirical Evidence on Market Efficiency in Developed Markets... 22

2.5.2 Empirical Evidence on Market Efficiency in Emerging Markets….. 24

3. DERIVATIVES MARKETS... 32

3.1 Derivative Market Concept……….. 32

3.2 Historical Development of Derivative Markets………... 33

3.3 Derivative Market Contracts………... 35

3.3.1 Forward Contracts……….. 35

3.3.2 Futures Contracts………... 36

3.3.3 Options………... 36

3.3.3.1 Basic Concepts of Option Contracts……….. 37

3.3.4 Swaps………. 38

3.4 Organizational Structure and Participants of Derivative Markets……….. 39

3.4.1 Markets……….. 39

3.4.2 Clearinghouse……… 39

3.4.3 Brokerage Houses……….. 41

3.4.4 Auditing Agencies………. 41

3.5 Empirical Evidence on Market Efficiency in Derivative Markets……….. 41

4. METHODOLOGY, DATA and APPLICATION………... 47

4.1 Methodology………... 47 x

xi

4.1.1 Linear Unit Root Test……… 48

4.1.2 Individual Nonlinear Unit Root Test………. 51

4.1.3 Linear Panel Unit Root Test………... 55

4.1.4 Nonlinear Panel Unit Root Test………. 57

4.2 Data, Analyses and Results………. 63

5. CONCLUSION………...……… 67 REFERENCES……… 69 APPENDICES APPENDIX A………... 78 APPENDIX B………... 80 CV…………..………86

v LIST OF TABLES

TABLES

Table 1 The Differences Between Forward Contracts, Future Contracts

and Options………. 38

Table 2 Moments of t_i,_NL Statistic………... 60

Table 3 Description of Futures Index Price Series……….………. 63

Table 4 Linear Unit Root Test Results………. 64

Table 5 Nonlinear Unit Root Test Results………... 65

Table 6 Linear and Nonlinear Panel Unit Root Test Results Without Cross Section Dependency……… 65

Table 7 Cross Section Dependency Test……….. 66

Table 8 Linear and Nonlinear Panel Unit Root Test Results With Cross Section Dependency……… 66

xiii

LIST OF FIGURES

FIGURES

Figure 1 Relationship among Three Different Information Sets………... 16

Figure 2 Cumulative Average Residuals for Winner and Loser Portfolios of

35 stocks (1-60 months into the Test period)... 20

 

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