the Budapest Stock Exchange (BSE), in order to see whether the market ..... shares belong to John M.T. King, 29.01% to Dawn Boyle, 20.45% to Margaret King.
Economics of Planning 33: 3–18, 2000. © 2000 Kluwer Academic Publishers. Printed in the Netherlands.
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Do Market Participants Learn? The Case of the Budapest Stock Exchange ANNA ZALEWSKA-MITURA1,2 & STEPHEN G. HALL2,3 1 Department of Economics, University of Bristol, 8 Woodland Road, Bristol BS8 1TN, UK; 2 Centre
for Economic Forecasting, London Business School, Sussex Place, Regent’s Park, London NW1 4SA, UK; 3 The Management School, Imperial College, 53 Prince’s Gate, Exhibition Road, London SW7 2PG, UK Abstract. In the paper we consider one of the faster growing Central European emerging markets: the Budapest Stock Exchange (BSE), in order to see whether the market becomes more weak-form efficient over time. The Hungarian exchange is selected because it is the oldest stock exchange operating in the region and, in 1995, it was the first Central European exchange admitted by the London Stock Exchange as a properly regulated stock exchange. As an econometric tool for comparative analysis, we use a Test for Evolving Efficiency (TEE). In a comparison of nine stocks and the market index (BUX) we found that the BSE becomes more mature but the process is surprisingly slow. Key words: G14, G15, C22
1. Introduction A process of market-oriented reforms began in Hungary in 1986 through the introduction of a two-tier banking system. The domestic commercial banking operations of the National Bank of Hungary and State Development Bank were taken over by three new commercial banks. Next, in January 1992, a law on commercial banks was adopted which imposed the Basle-defined standard for capital adequacy on Hungarian banks. Simultaneously with the changes in organisation of the financial structures the idea of creating the Budapest Stock Exchange, following an AngloSaxon pattern, was introduced. In April 1990, the Budapest Stock Exchange (BSE), as the first exchange in European post-commonunist countries, started to operate.2 After some initial years of stagnation, the Exchange started to grow rapidly with the acceleration of the privatisation process. New securities such as government bonds, corporate bonds, T-bills, investment funds and compensation coupons were introduced. Year 1997 might be considered the most successful year in the market’s history as the market capitalisation on 30 December 1997 reached 26,900 million USD. Seven years earlier, on 31 December 1990, the market capitalisation was just 266.9 million USD. In this paper we investigate whether the physical growth in terms of the number of stocks and trading frequency is supported by the growth of market maturity, here understood as an evolution towards market efficiency in the weak sense.
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Figure 1. Daily returns and results of the TEE for the Danubius’ shares.
The paper is organised as follows. Section 2 presents some details of the Budapest Stock Exchange: its historical background and regulations. In Section 3, the quantitative analysis is documented. First, in Section 3.1 an econometric tool, a Test for Evolving Efficiency is outlined. We are going to use the test for Evolving Efficiency to follow a process of market stabilisation. Section 3.2 presents data used in our studies, and in Section 3.3 results are discussed. Section 4 contains conclusions and the final discussion of the results.
2. Historical background and structure of the Budapest Stock Exchange As a result of reforms of the Hungarian banking system, on 21 April 1990, an inauguration session of the Budapest Stock Exchange took place. During the first session, 42 Memnbers (i.e. 19 commercial banks and 23 brokers) traded shares of just one company (Ibusz Rt.). The initial market capitalisation was just 1.6 million of USD. The next day, shares of Konzum Kereskedel Rt. joined the Exchange. In December 1990 there were 6 listed stocks and one year later, in December 1991, 20 stocks. At the beginning of April 1998, 54 stocks were publicly offered. As we can
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Figure 2. Daily returns and results of the TEE for the Domus’ shares. Table I. Main figures of the Budapest Stock Exchange for the 1990–1997 period
No. of equities∗ No. of securities∗ Capitalisation of equities∗ (USDm) Capitalisation of securities∗ (USDm) No of transactions (equities) No. of transactions Average daily number of transactions (equities) Average daily number of transactions
1990 1991
1992
1993
1994
1995
1996
1997
6 6
23 40
28 62
40 120
42 166
45 167
49 149
266.9 505.2
562.1
811.3
1,639.7 2,350.2 5,582.9
266.9 708.8
2,404.4 4,538.3 7,984.3 8,757.0 15,658.7 26,900.1
20 22
16,010.1
4,255 13,637 6,715 4,255 13,676 8,145
14,283 57,854 60,851 153,937 478,236 21,185 70,744 71,240 170,956 504,879
24
54
27
57
230
244
620
1,936
24
54
32
84
281
286
689
2,044
∗ End of period.
Source: Annual satistics 1997
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Figure 3. Daily returns and results of the TEE for the Fotex’s shares.
see in Table I, the very first years were rather lopsided. Investors did not have too many stocks to choose from, and the publicly offered stocks did not attract them very much. Over time the number of listed stocks grew and the BSE became more liquid. Growth has been positive since 1994 and it became very rapid in 1996, when the BUX index gained 133.5% (in USD terms) and thus outperformed all other emerging markets of the region. At the end of 1997, the Exchange was badly shocked by the Asian Crisis. However, recovery occurred quickly and the BUX index returned to its pre-crisis level by the end of December 1997. Despite the difficulties caused by the Asian Crisis, 1997 can be judged as the most successful year in the BSE’s history. The total number of transactions was over 100 times as many as in 1990,3 and about three times as many as in 1996. This progress may be due to the good performance of the Hungarian economy, speeding up privatisation and changes in regulations which allowed some non-members to make investments on the BSE. We should note that a lack of liquidity is a persisting weak point of the Exchange. Some stocks still are highly illiquid. Mostly, they are the stocks which joined the Exchange before 1994. In contrast, most of the stocks listed since 1995
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Figure 4. Daily returns and results of the TEE for the MOL’s shares.
are frequently traded.4 Among the most popular stocks are Tisza Chemical Group Company (TVK), Hungarian Oil and Gas Company (MOL), National Saving and Commercial Bank (OTP), Richter Gedeon Vegyeszeti Gyar Rt. and Bordsodchem Rt. Among the most thinly traded are Aranypok Kereskedelmi Rt, Bonbon Hemingway Kereskedelmi Rt., Gar Agent Hungarian Trading Plc, Nitroil Chemical Engineering and Production CL and Novotrade CL. In Table II we present more details about the Hungarian least, medium and most frequently traded stocks. We provide the date of the first listing, the number of transactions, the average number of transactions, the total number of shares, the ratio of shares publicly offered, P/E ratio and, finally, dividends. All the values refer to the market year 1997 except for the dividends which refer to 1996. Table II suggests that the level of illiquidity is highly related to the ownership structure of shares.5 For instance, if the Nitroil’s shares are owned by a few big investors6 an ordinary market participant has a little chance to buy and, in consequence, to sell the Nitroil’s shares. We also see that the most popular stocks tend to have the high P/E ratios. It is interesting that they are not popular due to dividends. The highest dividends did
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Figure 5. Daily returns and results of the TEE for the OTP’s shares.
not cover inflation which was above 20% in 1996. This suggests that capital gains are the main way of earning profits. The Budapest Stock Exchange is organised according to the Anglo-Saxon model. This means that all transactions are to be implemented on the Floor of the Stock Exchange during the opening hours by brokers authorised by the members of the Stock Exchange. During the trading session the brokers may make bids and offers orally or in writing, and may respond to the bids and offers of other brokers in accordance with the provision of the Rules of the Budapest Stock Exchange. As mechanisms to stabilise the movement of prices, breaks and suspensions of trading were introduced. A break means a suspension of trading in the given share, and therefore no bids or offers can be made for it. The temporary suspension of the sale and purchase of a given security can be ordered by the speaker if the change in the share price admitted to the Stock Exchange is greater than ±10%, but less than ±20%, compared with the opening price. The trading break may last 5 minutes. If the change in price, compared with the opening price, is bigger than ±20%, the break may last 5–10 minutes.7 Moreover, the Chief Executive Officer may suspend
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Figure 6. Daily returns and results of the TEE for the Pannon-Flax’s shares.
trading in certain securities for a maximum period of three days, notifying the issuer at the same time, if he or she deems that the development of the share price or the trade execution cannot be supported by the information or facts known to the public. In the case where it is suspected that further trading of a given security cannot offer organised, fair and transparent trading on the Stock Exchange because of an irregular development of prices or trends of transactions, the Stock Exchange Board or the Supervision Board may suspend trading on that security for an undefined period of time. Another suspension, ordered by the Chief Executive Officer, can stop trading in certain types of securities or all the securities on the Exchange. Trading can be suspended if the Chief Executive Officer deems that continued trading would endanger the well-being of investors or the operation of the Stock Exchange. This kind of suspension can last one day. In spring 1997, the general meeting of the BSE developed a new model for its operation. The major elements of the new model are the establishment of market segments for different instruments (called sections), the extension of those entitled to trade on the stock exchange as well as changes in the voting rights of the general
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Figure 7. Daily returns and the results of the TEE for the Primagaz’s shares.
meeting and in the structure of fees. The new act has significantly changed the principle of regulation by opening certain markets of the stock exchange to market participants, primarily banks, which were kept at arm’s length since the foundation of the BSE in 1990. Until 1997, only stock-brokers operating in a company form (limited liability company or share company) were allowed to be members of the BSE and, consequently, traders. The new act relaxes this limitation allowing some non-memnbers to participate in investment activities (only institutions authorised to trade in shares can be members). The new act has opened up markets in government securities and derivative products for credit institutions. Moreover, private individuals can make transactions personally (on their own account) in the derivatives market.
3. Can we observe any process of learning? Over time the market has become more liquid. As time passes, investors can choose from a wider range of stocks and the number of transactions has increased. Some
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Figure 8. Daily returns and results of the TEE for the Richter’s shares.
stocks have even graduated successfully to international exchanges. But is the market becoming efficient in a formal sense? Has the Exchange’s structure and regulations developed enough to make the market free from manipulations and speculations? In other words, is there any movement towards efficiency, at least, in the weak sense? In the following sections we answer the questions using a new econometric tool – a Test for Evolving Efficiency (TEE) which we apply to selected Hungarian stocks and the market index (BUX).
3.1.
THE TEST FOR EVOLVING MARKET EFFICIENCY
According to the classical approach a well-functioning market should be efficient, at least, in the weak sense (Fama, 1991). This means that market participants should not be able to have abnormal profits using information contained in the past price movement. Weak-form efficiency can be tested through the size of the autocorrelation coefficients of abnormal returns. This is equivalent to the idea that
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Figure 9. Daily returns and results of the TEE for the Zalekaramia’s shares.
the corresponding autocorrelation coefficient of abnormal returns should be equal to zero if a market is efficient. To detect an evolutionary process taking place on the BSE we propose to use the Test for Evolving Efficiency (TEE) which was first introduced in a paper by Emerson et al. (1997) and discussed in detail by Zalewska-Mitura (1998), and Zalewska-Mitura and Hall (1999). Using the TEE, we can detect changes in weakform efficiency or, in other words, see whether the market developed and matured. The test allows us to state whether there was any significant change in market behaviour across time, whether stocks which started to be listed at different points of time (i.e. at different stages of a market’s development) show different patterns of autocorrelation of returns. The version of the TEE that we use in this paper is a GARCH-M(1,1) model with time varying coefficients, which is given by the following system of equations: rt = β0t + β1t rt −1 + δht + et , ht = α0 + α1 ht −1 + α2 et2−1 , β1t = β1(t −1) + vt
(3.1a) (3.1b)
(3.1c)
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Figure 10. Daily returns and results of the TEE for the market index BUX.
where rt are daily returns, error terms et ∼ N(0, ht ) and vt ∼ NI I D(0, v 2 ). The TEE differs from the classical approaches for testing for autocorrelation of returns, as it tests for changes in the autocorrelation coefficient of returns. The subscript t appearing with the β1 coefficient means that the coefficient can alter over time following formula (3.1c). In other words, the TEE does not treat efficiency as a market property that is steady over time, but searches for its dynamics. 3.2.
DESCRIPTION OF THE TESTED STOCKS
The purpose of this paper is to follow the process of learning taking place on the Budapest Stock Exchange. Therefore, we look at stocks which can offer us the most descriptive information about behaviour of the BSE’s market participants, i.e. we chose stocks which had the longest history and were frequently traded. Out of the five most frequently traded stocks (presented in Table II) we selected three with the longest price series (MOL, OTP, Richter). We also consider six other stocks which are listed since the early 1990s. These stocks are amongst the oldest Hungarian stocks, in terms of the listing time, and traded frequently enough to be useful in our analysis. Three of them (Danubius, Pannon-Flax and Zalekaramia) suffered
14 Table II. General information about selected Hungarian stocks for 1997. Dividends refer to 1996 Stocks
1st listing No. of Deals/ Number of transactions session shares
Aranypok Bonbon Hem. GarAgent Nitroil Novotrade Danubius Domus Fotex PannonFlax Primagaz Zalekaramia Bordsodchem MOL OTP Richter TVK
11.08.94 21.06.91 19.12.91 06.02.91 09.04.91 23.12.92 28.12.93 13.11.90 17.06.91 23.12.93 01.08.91 21.03.09 28.11.95 10.08.95 10.11.94 06.08.96
150 113 28 23 27 16,788 1,471 15,541 1,445 6,197 12,947 20,753 111,555 38,115 21,447 113,535
1 0 0 0 0 68 6 63 6 25 52 84 484 154 87 460
43,000 170,000 368,050 27,490 1,330,286 8,000,000 1,633,000 66,143,090 1,157,564 3,600,000 3,006,457 10,204,798 98,400,000 26,850,000 17,412,102 24,000,000
Public P/E offer (≈%) ratio 19 48.9 9 0.2 3.5 11 29.93 4.4 13.17 25.7 9.26 24.2 12 27.77 11.72 21
4.94 18.68 15.76 7.8 7.47 23.08 10.48 41.37 11.75 24.54 19.88 6.92 29.51 21.79 33.42 6.92
Dividends (% (96)) 10.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.78 2.54 1.16 1.63 0.75 1.15 0.69 1.63
Source: Company fact book 1997
from thin trading at the initial period, but started to be frequently traded later. This initial thin trading might be explained by the ownership structure of the shares. For instance, in 1992 and 1993, more than 50% of the Danubius’ shares were owned by the State Property Agent and about 11% by municipalities. Only about 20% of shares were in private hands at that time. More frequent trade of the Danubius’ shares has been observed since 1994, when over 72% of shares were in the hands of small investors. Similarly, the initial division of the Zalekaramia’s shares (State Property Agent owned over 47%, and IMI Securities over 52% of the shares) did significantly limit the accessibility of the assets. In contrast, in 1995 small investors held nearly 75% of the Zalekaramia’s assets. In the case of Pannon-Flax, small investors did not play a great role over the whole period (they controlled 7–8% of shares). However, since 1995, a number of institutional share owners grew and the structure of the share ownership has been changed significantly. In Table III, for each selected stock, we show the date of the first listing,8 a number of data points in our samples and a company’s profile. All the analysed price series refer to daily average prices and end on 27 February 1998. In our analysis we also use the market index (BUX) which started on 2 January 1991. For the market index we have a time series of 1793 data points.
15 Table III. General information about selected stocks listed on the BSE Shares
1st listing session
Number of data points
Profile
Danubius Hotal and SPA RT. Domus Kereskedelmi Reszvenytarsasag Fotex First American–Hungarian Photo Servicing MOL OTP
23.12.92
1294
28.12.93
1041
13.11.90 (02.01.91) 28.11.95 10.08.95
1793
17.06.91
1678
Four- to five-star hotels to health tourism Home & office furniture, retail and wholesale Holding company (goods and services) Gas and oil industrial company Financial services: insurance, investment, leasing, etc. Linen-weaving company
23.12.93
1043
10.11.94 01.08.91
821 1645
Pannon-Flax Gyori Lenszovo Reszvenytarsasag Primagaz Hungaria Industrial Commercial Co. Richter Gedeon Zalekaramia Ltd.
3.3.
558 628
Distribution of liquefied petroleum and in cylinders Pharmaceutical company Production of floor tiles and sanitary ware
RESULTS OF THE TEST FOR EVOLVING EFFICIENCY
From Figures 1–9 we see that each stock tells us a different story.9 We cannot observe any trend common for all or, at least, most of the tested assets. Moreover, there are no substantial discrepancies between stocks which joined the Exchange before and after 1995. More precisely, the time-paths of the β1 coefficients estimated for MOL, OTP and Richter. (Figures 4, 5 and 8, respectively) start from values as high as 0.2–0.4, as do the time-paths estimated for Fotex or Primagaz (Figures 3 and 7, respectively). The low initial values of the β1 coefficients obtained for Danubius, Pannon-Flax and Zalekaramia are spurious as they were estimated for periods of high illiquidity and hence, should not be considered as credible.10 When assets of those companies became frequently traded the β1 coefficients moved to significantly higher values. This leads us to a conclusion that the only timepaths insignificantly different from zero at the initial period of listing were those estimated for the Fotex’s and Domus’ shares. We also see that only one time-path of the β1 coefficient out of three timepaths estimated for the most liquid (and youngest, in the sense of listing) stocks converges towards zero and becomes insignificant (the case of OTP, Figure 5). The other two estimated curves do not show any such trend (Figures 4 and 8). Among the time-paths of the β coefficients estimated for the ‘older’ shares we see three curves insignificantly different from zero. However, it would be hard to
16 Table IV. The GARCH processes estimated for the Hungarian stocks. Standard errors are shown in brackets Stock
GARCH process
ht = 0.00 + 0.72ht −1 + 0.19et2−1 (0.00) (0.02) (0.01) Fotex ht = 0.00 + 0.79ht −1 + 0.27et2−1 (0.00) (0.09) (0.04) OTP ht = 0.00 + 0.65ht −1 + 0.23et2−1 (0.00) (0.11) (0.55) Primagaz ht = 0.00 + 0.88ht −1 + 0.10et2−1 (0.00) (0.01) (0.03) Zalekaramia ht = 0.00 + 0.21ht −1 + 0.16et2−1 (0.00) (0.05) (0.02)
Danubuis
Stock
GARCH process
ht = 0.00 + 0.88ht −1 + 0.11et2−1 (0.00) (0.01) (0.04) MOL ht = 0.00 + 0.00ht −1 + 0.40et2−1 (0.00) (0.00) (0.27) Pannon-Flax ht = 0.00 + 0.62ht −1 + 0.25et2−1 (0.00) (0.02) (0.05) Richter ht = 0.00 + 0.14ht −1 + 0.31et2−1 (0.00) (0.05) (0.46) BUX ht = 0.00 + 0.72ht −1 + 0.17et2−1 (0.00) (0.02) (0.01) Domus
classify them as a sign of the growth of market efficiency. The time-path estimated for the Zalekaramia’s shares, although insignificantly different from zero over the whole period, shows an ‘upward’ trend towards larger inefficiency (Figure 9). The curves obtained for the Danubius’ and Fotex’s shares manifest such a strong variability of pattern that they also cannot be treated as a proof of a proceeding market stabilisation. Among the other three time-paths of the β coefficient only one (the case of Primagaz, Figure 7) supports the hypothesis of a market stabilisation. The curve moves slowly but persistently towards zero. The time-paths estimated for the Domus’ and Pannon-Flax’s shares (Figures 2 and 6, respectively) dropped down, too, but reminded significantly different from zero. Finally, the time-path of the β1 coefficient estimated for the BUX index (Figure 10) does not tend towards zero, but remains on a highly positive, significantly different from zero level. This result also suggests the Budapest Stock Exchange is still on its way into becoming a mature market. To complete the presentation of the results of the Test for Evolving Efficiency, in Table IV we present estimated parameters of the GARCH processes for all the stocks and the market index. We see that the influence of the component related to the past shocks is strong for all the examined series. Although, in the case of the three youngest stocks (OTP, MOL and Richter) the coefficients related to the past error terms. however very high, are insignificantly different from zero. 4. Conclusions The classical approach states that a perfect market should be efficient. In this paper we concentrate on informational efficiency in the weak sense, which says that a market is weak-form efficient if using information about past share price move-
17 ment investors cannot earn abnormal profits. To test whether the Budapest Stock Exchange becomes weak-form efficient we use the Test for Evolving Efficiency. The test detects changes in the autocorrelation coefficient of returns and in this way allows us to observe whether any process of improvement of efficiency has been taking place on the Hungarian market. In the paper we test nine liquid stocks and the market index to answer the question about the performance of the BSE. We find that although the Hungarian exchange develops over time, the process of learning is rather slow. Only two out of ten estimated time-paths of the autocorrelation coefficients of returns decline towards zero (OTP and Primagaz). The other estimates do not show a declining pattern of the autocorrelation coefficients (e.g. MOL or Richter) or the drop down is so strong that the autocorrelation coefficients of returns become significantly negative (e.g. Domus and Pannon-Flax). Interesting curves are estimated for the Danubius’ and Fotex’s shares. There time-paths of the autocorrelation coefficients manifest high variability. The changes of the patterns seem to be associated with the clustering effects observable for the series of returns. Summarising, the process of learning does take place on the Budapest Stock Exchange. As time passes the market grows in a number of listed securities and the quality of services improves. However, a process of ‘becoming a more mature market’ seems to be longer than it might be expected. After eight years there is a mere evidence of an improvement of market efficiency.
Notes 1 The research was undertaken with support from the European Union’s Phare ACE Progamme
1996. 2 In fact, it was reopening of the market, as the Budapest Stock Exchange operated in the 1864– 1948 period. 3 The statistic of 1990 covers the period 21 June–31 December only. 4 There are some exceptions. For instance, the Zalekaramia’s shares, highly illiquid in the early 1990, became popular among investors and can he classified as frequently traded in 1997. However, shares of Kekkuti Asvanyviz, listed since Decemher 1996, are highly illiquid as, in average, there were 2 transactions per session in 1997. 5 The ownership structures are a consequence of different privatisation schemes. 6 49.97% of shares belong to John M.T. King, 29.01% to Dawn Boyle, 20.45% to Margaret King and 0.37 to Österreichische Kontrollbank. 7 These restrictions about price limits and timing of breaks in trading were introduced in spring 1997. Before 1997, execution of transactions could be stopped up to 10 minutes if prices were changing within 20–30% barriers. If a security price was changing more than 30% then the trade could be stopped for 10–20 minutes. 8 Dates in brackets refer to the first days of our samples if they differ from the first listing days. 9 The solid lines show the estimated time-paths of the β coefficients. The dotted lines refer to 1 the 95% confidence intervals. 10 We decided to include periods of thin trading in the examined samples to have the same lengths of series on both graphs (a) daily returns and (b) results of the TEE.
18 References Budapest Stock Exchange (1998), Annual Statistics 1997, Budapest, Akaprint. Budapest Stock Exchange and Bank & Tozsde (1997), Company Fact Book 1997, Budapest. Emerson, R., Hall, S.G. and Zalewska-Mitura, A. (1997), ‘Evolving market efficiency with an application to some Bulgarian shares’, Economics of Planning 30, 75–90. Fama, E.F. (1991), ‘Efficient capital markets: II’, Journal of Finance 46, 1575–1618. Zalewska-Mitura, A. (1998), ‘Emerging markets from Central and Eastern Europe: problems of thin trading, price limits and evolving market efficiency’, Ph.D. Thesis, London Business School. Zalewska-Mitura, A. and Hall, S.G. (1999), ‘Examining the first stages of market performance. A test for evolving market efficiency’, Economics Letters 64, 1–12.
