EVOLVING MARKET EFFICIENCY IN ISTANBUL STOCK EXCHANGE

Alövsat MÜSLÜMOV (Doğuş University)
Güler ARAS (Yıldız Technical University)
Bora KURTULUŞ (Doğuş University)

Tests of market efficiency are concerned with whether or not the market does correctly use available information in setting security prices. Weak-form efficiency tests are concerned whether current security prices fully reflect any information in past prices and returns.

The main purpose of this study is testing weak-form market efficiency hypothesis in ISE using the broadest sample and time series coverage that have been ever used. We use stock prices data of all companies that constitute ISE-100 index with time series covering 1990-2002 years. We test not only whether ISE is efficient in the weak-form sense, but also whether and how it is becoming more efficient.For this purpose, we use a multi-factor model with time-varying coefficients and generalized auto-regressive conditional heteroscedastic (GARCH) errors. If the markets are becoming more efficient, the time-varying coefficients are expected to become more stable as time elapses.

In addition to testing for market efficiency, we provide a model that explains the market inefficiencies. We argue that market inefficiencies are most probably due to the low level of trading volume and market capitalization of shares. In order to test this hypothesis, we use discriminant analysis.

At the end of this study, we suggest and develop an index to measure informational efficiency for ISE that is one of the dimensions of the stock market development. The variable values are calculated against the base year of 1990 and incorporate information about weak-form market efficiency level in ISE.