Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

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Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market M. Kabir Hassan, Ph.D. University of New Orleans Anisul M. Islam, Ph.D. University of Houston-Downtown Syed Abul Basher York University Contact Author M. Kabir Hassan, Ph.D. Associate Professor of Finance Associate Chair Department of Economics and Finance University of New Orleans New Orleans, LA 70148 Phone: 504-280-6163 Fax: 504-280-6397 Email: mhassan@uno.edu First Draft: December 1999 Second Draft: February, 2000 Third Draft: May, 2000 This Draft: June, 2000
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1 Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market Abstract This paper empirically examines the issue of market efficiency and time-varying risk return relationship for Bangladesh, an emerging equity market in South Asia. The study utilizes a unique data set of daily stock prices and returns compiled by the authors which was not utilized in any previous study. The Dhaka Stock Exchange (DSE) equity returns show positive skewness, excess kurtosis and deviation from normality. The returns display significant serial correlation, implying stock market inefficiency. The results also show a significant relationship between conditional volatility and the stock returns, but the risk-return parameter is negative and statistically significant. While this result is not consistent with the portfolio theory, it is possible theoretically in emerging markets as investors may not demand higher risk premia if they are better able to bear risk at times of particular volatility (Glosten, Jagannathan and Runkle, 1993). While circuit breaker overall did not have any impact on stock volatility, the imposition of the lock-in period has contributed to the price discovery mechanism by reverting an overall negative risk- return time-varying relationship into a positive one. As a policy to improve the capital market efficiency, the timely disclosure and dissemination of information to the shareholders and investors on the performance of listed companies should be emphasized.
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2 Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market 1. Introduction While empirical tests of return-volatility behavior are plentiful for developed stock markets, the focus on developing and emerging stock markets has begun in recent years. The interest in these emerging markets has arisen from the increased globalization and integration of the world economies in general and that of the financial markets in particular. The globalization and integration of these markets has created enormous opportunities for domestic and international investors to diversify their portfolios across the globe. As a result, rigorous empirical studies examining the efficiency and other characteristics of these markets would be of great benefit to investors and policy makers at home and abroad. A number of papers (Haque and Hassan, 2000; Harvey, 1995a,b: Harvey and Bekaert, 1995; Bekaert,
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This note was uploaded on 01/29/2012 for the course ECONOMICS 101 taught by Professor Tikk during the Spring '11 term at University of Toronto- Toronto.

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Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

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