Efficiency of Financial Markets in Transition: The Case of Macroeconomic Releases

This paper contributes to the discussion on the efficiency of newly emerged financial markets in transition economies. We use data on one of the most developed financial markets in transition, the Czech Republic, to investigate financial market efficiency by examining the reaction to macroeconomic releases. Direct measure of market expectations, that is, survey data, is used to form a proxy for market expectations. The reactions of interest rates, bond yields, exchange rates, and the stock market index are explored. We found that, despite the fact that the survey data appear to reasonably approximate rational expectations, the Czech market lacks basic efficiency properties. It reacts to the expected part of the news announcement, and the adjustment is stretched over a period of several days. In the case of CPI, we found evidence suggesting that the efficiency of the market improves over time.