Abstract
In a current stock market situation many analysts believe that the financial crisis is just the market correction. Based on this assumption we can say that the recession should make the stock market more transparent and efficient. In order to ……. Applying different market efficiency models the Russian stock market will be analyzed and compared the data before the financial crisis and during the recession. We apply market efficiency models to the returns from the two main indexes of the Russian stock market, running from September 2007 to the end of September 2009
Introduction
The Russian Stock market has passed for last 15 years has changed from the transition to the emerging market.
Formal criteria of definition of Stock market development by The World Bank are indicated below:
1. The stock market functions in the country with high level of Economic development;
2. Market capitalization is comparable and even surpasses gross national product of the given country.[1]
Natural addition to the criteria listed above, in turn, are the approaches estimating level of development/backwardness of the stock market on the basis of possibility of an estimation and forecasting of change of the prices in the given concrete market. One of the basic divisions of the market in this case is division into the efficient and inefficient markets. For last decade the set of researches on the given subjects both for developed and developing countries has been done. Among such researches - works of such authors as Moris Kendel, Eugene Fama, Andrew Lo, Kreg Makkinli). Results of the given researches have confirmed correlation between efficiency and development, and also have defined a number of "qualitative" models for an efficiency estimation.
As a result of studying of researches on the given subjects were
Main objectives of the given work are formulated:
Ø Ordering of the basic methods applied to an estimation of efficiency;
Ø The analysis of possibility of application of the basic quantitative methods of an estimation of the efficiency, offered in the theory, to the Russian practice;
Ø An estimation of efficiency of the Russian stock market during the pre-crisis period (the moment of the termination of the period of an estimation - September, 2008) and during the recession (the moment of the termination of the period of an estimation - September, 2009).
The urgency of the given research is caused by the following circumstances:
Ø The role of the stock market as way of attraction of the additional capital will increase further in this connection quality standard of a market situation accepts significant for researchers and investors the purpose;
Ø In a current situation of financial crisis, crisis of liquidity importance of an estimation of quality of the created market, and also an estimation of current level of efficiency leaves on the foreground;
Ø Efficiency of the stock market makes essential impact on a country financial system, allows to reduce level of system risks, to raise a transparency of transaction and to reduce level of price fluctuations that generally promotes growth of appeal of the market from positions of strategic investors and proves importance of acquisition by the Russian market of characteristics of the effective.
Object of research is the hypothesis of efficiency of the market with reference to current conditions of the Russian stock market, and also an estimation of efficiency of the pre-crisis stock market of Russia. Object of research - the market of the most liquid actions of the Russian stock market (so-called «blue cheeps»).
For achievement of the purposes of the given work following problems have been put:
Ø To carry out the general analysis of dynamics of development of the Russian stock
The market to consider dynamics of capitalization, market indexes,
Structure of the stock market during the current and pre-crisis period;
Ø To carry out the analysis of existing methods of an estimation of stock market efficiency and on its basis to carry out a choice most well-founded methods of an estimation of efficiency for the subsequent applications to the Russian practice;
Ø To analyze practical results of the chosen methods with reference to the Russian market in the conditions of the financial crisis (the moment of the termination of the period of an estimation - 2009 September) and to pre-crisis level of development (the moment of the termination of the period of an estimation - September 2008).
Definitions:
* Market efficiency - determines the degree to which stock prices reflect all relevant information. Market efficiency has varying degrees: strong, semi-strong, and weak. Stock prices in a perfectly efficient market reflect all available information. These differing levels, however, suggest that the responsiveness of stock prices to relevant information may vary.[2]
* Recession - a significant decline in activity across the economy, lasting longer than a few months. The global recession of 2008-2009 brought a great amount of attention to the risky investment strategies used by many large financial institutions, along with the truly global nature of the financial system.
* market correction - A relatively short-medium term drop in stock market prices, generally viewed as bringing overpriced stocks back to a level closer to companies' actual values. In technical analysis, a reversal in the direction of prices following a period of sustained price movement. The term often is used informally to indicate that the market or the price of a stock or commodity has changed directions[3]
1 Chapter
1.1 Russian stock market features
Established in 1995, as the first regulated stock market in Russia, RTS Stock Exchange now trades the full range of financial instruments from cash equities to commodity futures.
The RTS Index first calculated on September 1, 1995, has since become the main benchmark for the Russian securities industry and is based on the Exchange's 50 most liquid and capitalized stocks.
Today's RTS product line includes:
Ø RTS Standard, a new front-rank equity market for the most liquid Russian securities characterized by absence of 100% asset depositing, standard T+4 settlement in rubles, use of CCP technology, consolidated cash position on RTS Standard and on FORTS, RTS derivatives section and portfolio-style approach to margining spot and derivatives markets positions.
Ø RTS Classica, the only trading platform in Russia that allows for settlement in both rubles and foreign currency. RTS Classica is equally accessible to both Russian and foreign investors. The standard settlement cycle is T+4 DVP. There are no requirements to deposit securities and cash before a trade. Over 500 securities are trading on this market.
Ø RTS T+0 Market, securities trading for retail investors with full preliminary deposit of assets and ruble settlement.
Ø RTS Board, the quote-driven market for unlisted stocks and bonds.
Ø FORTS, futures and options market with ruble settlement. Trading since 2001. Today, 47 contracts are offered (34 futures and 13 options) on stocks of Russian companies, bonds, short term interest rates, currency, RTS Indices, oil, oil products, metals and sugar. The most active contract is futures on the RTS Index.[4]
The RTS Stock Exchange calculates and publishes 9 indexes: RTS Index, RTS-2 Index, and 7 sectoral indexes. The RTS Index and the RTS-2 Index are calculated using two different lists of stocks.
The RTS Index, RTSI, the official Exchange indicator, first calculated on September 1, 1995, is similar in function to the Dow Jones Average in New York City. In contrast with an unweighted (speculative) index, the RTS index is much more stable with respect to sharp oscillations of a single stock price, since companies with large capitalization make the main contribution to the index. As a rule, the stocks of such companies are extremely tolerant to the momentary behavior of individual players.
The Russian stock market exists the little more than 15 years and for this period its basic characteristics have been changed essentially. It concerns the general structure, the basic trading platforms, trade rules and structure of participants etc.
The Russian market of capitals, on one hand, is similar to many other emerging markets, on the other hand - the Russian market is based on economy of the former superstate, with the large enterprises and high capitalizations. Despite the destructive character of a transition period and disintegration of the USSR, the Russian economy already is in force of the scales possesses a development more potential.
The term «the formed market» (emerging market) designate
The stock market which is in process of development, that increases on size, activity, complexity of the organization. In general case, the stock market is considered to be emerging if it corresponds at least to one of the following criteria
1. The stock market is in the country with low or middle level of economic development, (in terms of World bank)
2. Market capitalization is low in relation to gross national product of the given country.
The countries with high level of the income, on classification World Bank, are the countries in which GNP throughout last three years per capita made a 10 thousand dollars order per year. Low level of capitalization means that the relation of capitalization of the market to gross national product of the country is less, than at 25 % most
The developed emerging markets which are of interest for world investors. The stock market on which there are restrictions on foreign investments, serious state intervention in activity of the stock market, cannot be developed. The condition of a domestic securities market up to crisis 1998 was almost completely defined by a state policy in the field of issue and placing of the state promissory notes. The state loans took places under the ultrahigh prices, concerning the general level of profitableness in economy and for short term, thus the system of regulation of a public debt practically was absent. A turn on operations with the state papers made more than 85 % of all market. Scales of issue which conducted to sharp increase of a public debt (an internal debt has reached to the middle of 1998 25.6 % of gross national product), have served one of the reasons of crisis of 1998
1.2 Influence of financial crisis on the Russian stock market indicators.
1.3 Stock market efficiency
We define a financial market as efficient if all publicly available information is fully exploited so that there are no abnormal profits. In the financial economics literature, there are two aspects of the efficiency of financial markets, namely the operational efficiency and the allocation efficiency. The former requires that the participants supplying and demanding funds are able to carry out transactions cheaply, while the latter requires that the prices of securities are such that they equalize the risk-adjusted rates of return across all securities (i.e. securities with the same level of risk will offer the same expected return). In an allocation efficient market savings are allocated to productive investment in an optimal way and all participants in the market benefit. These two types of efficiency are strongly linked. Operational efficiency can be directly measured fairly easily in the form of bid-ask spread and commission rates. We therefore concentrate on the question of measuring the extent of allocation efficiency. This notion of efficiency is often redefined in terms of various types of efficiency as follows. A market is weak efficient if security prices fully reflect the information contained in past price movements. That is, they do not follow patterns which repeat and it is not possible to trade profitably purely on the basis of historical price information. A market is semi-strong efficient if security prices fully reflect all publicly available information. That is market participants cannot make superior returns by ‘searching out' information from publicly available sources, since the information is already incorporated into security prices. A market strong efficient if security prices fully reflect all relevant information whether it is publicly available or not. In such case, no investor could ever earn consistently superior returns (even an insider with his inside knowledge).
As a failure of weak form efficiency implies a failure of semi-strong and strong form efficiency, we confine our analysis to this most basic notion of efficiency as it may be the case that the Russian markets have not even met this condition yet.
2 Chapter the description of the basic stock market efficiency models and analysis.
2.1 Local Expectation Hypothesis (LEH) model
One of indirect methods used by many scientists, applicable for an estimation of the stock market efficiency is Local Expectation Hypothesis, LEH[5]
The base version of which was Modigliani - Miller formula[6]:
Pt = (1 + r)־¹ E (P t+1 ׀ Ω t)
(2.1.1)
Where Pt , P t+1 are the assets equilibrium price during the periods t and t+l.
In case if there is a stock instead of asset the formula can be modified:
Pt = (1 + r)־¹ E (Dt +P t+1)
(2.1.2)
Where
D - the cash flow generated from assets, in this case it represents dividends;
t E - estimated future value
r - effective rate of return (the average rate of return from alternative investment tools).
In case of perpetuity formula can be changed:
E(dPt) + D× dt = Pt × rt ×dt
(2.1.3)
Where dPt= Pt+dt - Pt
if D=0 the formula will be :
E(dPt) = Pt × rt ×dt
(2.1.4)
Formulas (2.1.3) and (2.1.4) mean that demanded short term average rate of return on asset is equal to the alternative rate of return. As were mentioned above, formula LEH represents the fundamental of rational expectations hypothesis. If investor has an estimated system of behavior of the rate of return in a short term, this formula allows him to get the equilibrium price of different assets.[7]
Essentially important assumption, allowing checking up the given hypothesis empirically, that investors do not expect a fast change of a stock market trend.
K.Frut and M.Obstfeld have brought a fundamental contribution to the given method calculating the settlement equilibrium price of an asset (2.1.2) , based on statistical estimation.[8]
2.2 Models based on the arbitrage theory of pricing.
3 Chapter. Empirical analysis of the Russian stock market efficiency.
As already stressed earlier, the aim of this paper is to evaluate empirically whether the
Russian equities market has become less auto-correlated, which we like to interpret as a condition of increasing weak form of efficiency of the market. In addition, our models allow us to test whether the market has been affected by macro and qualitative factors, and finally if there is any presence of risk premium. We use general stock index and a few heavily traded individual stocks. We begin by considering the stock index.
Russian Stock Index
[1] www.worldbank.org
[2] www.investopedia.com
[3] http://money.cnn.com/services/glossary/m.html
[4] www.rts.ru
[5] Maringales and Arbitrage in Multiperiod Securities Markets”, Harrison M, Kreps D. Journal ofEconomics, 20, 1970, p. 381-408
[6] “Dividends Policy, Growth and valuation of stocks”,Miller M, Modigliany J, Journal of Business, 1961,34, 411 - 433
[7] “The valuation of floating rate instruments”. Sundaresan S., Journal of Financial Economics, 20, 251
[8] Instrinsic Bubbles: The Case of Stock Prices”, Frut K., Obstfeld M. , American Economic Review,1999, 81(5)
[9] www.rts.ru
