Measuring Different Aspects of Market Efficiency: A Comparative Study Between The United Kingdom and Bangladeshi Stock Markets

This thesis examines the various aspects related to market efficiency between the United Kingdom and Bangladeshi stock markets. The Efficient Market Hypothesis (EMH) states that on-going security prices are able to show all the relevant information about the intrinsic value of those securities either directly or indirectly available at that time. Therefore, it is impossible to employ the prices currently seen in order to forecast future security prices. Estimation of market efficiency is imperative from an investors’ position because of its significant role in developing successful investment plans or trading strategies. The majority of earlier studies have examined this area in the context of either developed or other developing economies. However, a comparative study on the market efficiency between one developed economy and one emerging economy has not been commonly observed. The current study attempts to cover this literature gap by conducting a comparative investigation of market efficiency between Bangladesh and the United Kingdom. In this case, the FTSE 100 from the UK Stock Exchange and the DSE Gen Index from the Dhaka Stock Exchange have been considered.

The first section applies, daily, weekly and monthly stock indexes from two different stock markets, these have been used to examine whether they exhibit characteristics that comply with the Random Walk Hypothesis (RWH). A Runs Test, Ljung-Box Q-Test, Lo- Mackinley Variance Ratio Test, as well as a Chow-Denning Multiple Variance Ratio Test have been used in order to examine stock price behaviour between these two stock markets. In exceptional of the run test, all of the above mentioned test results indicated that the daily and weekly data series did not follow random walk for the UK and Bangladeshi stock markets. Conversely, monthly data series results adhered to the random walk properties for both economies. On the other hand, the percentage of the Run test as compared to the entire set of daily, weekly and monthly data series for the UK Stock Markets is greater than that of the Bangladeshi Stock Markets. This comparative evolution implied that the FTSE 100 Index was found to be less-random than the DSE Gen Index.

Secondly, the Soren Johansen’s Cointegration analysis was used to estimate the long-run equilibrium between stock prices and the few specific macroeconomic variables (i.e., consumer price indexes, exchange rates, deposit interest rates, broad money supplies, per capita GDP, balance of trade, international crude oil prices, foreign remittance, treasury bill rates) between the UK and Bangladeshi Stock Markets. A significantly large sample data between January 1998 and June 2018 has been employed to carry out this estimation. Johansen’s Cointegrating test shows that there is clearly a long run equilibrium relationship in place when cointegrating vectors exist between the specified variables. Therefore, it can be said that the Bangladesh and UK stock prices have a long run equilibrium relationship, in the context of the macroeconomic variables in their economies.

The second section also relates, the short-run disequilibrium adjustment has been examined in the context of the UK and Bangladeshi Stock Markets through the application of the Vector Error Correction Model (VECM). For the UK, the outcome shows that the error correction term holds an extremely small standard error, and this is characteristic of the validity of the results. Once the specified macroeconomic variables were taken into account with the VAR model, it was found that stock price in the UK needs less time than in Bangladesh to reach equilibrium condition. When the two markets were compared, the data showed that the UK stock market can fix disequilibrium issues with greater efficiency than the Bangladeshi Stock Market. As a result, the findings offer rational standards regarding the rapidity of short-run disequilibrium changes between Bangladesh and the UK.

Thirdly, the Toda-Yamamoto Granger Causality Test was used here to examine the dynamic long-run causal relationship that exists between stock prices and specific macroeconomic variables for Bangladesh and the UK within the sample period. The findings showed that when it came to macroeconomic development and progress, Bangladesh and the UK have a lower likelihood and the causal evidence amongst stock prices and macroeconomic variables offer varying results across the two nations. A significant amount of uni-directional causal evidence existed between the stock prices of both economies and the specific macroeconomic variables. However, some exceptional evidence was identified within the UK economy context.

Finally, after examining and evaluating the data analysis of the DSE and LSE in the previous chapters, the scrutinised recommendations have been provided at the end of this thesis to deal with the problems faced in obtaining market efficiency in some cases by the Dhaka Stock Exchange.

The outcomes of the research differed as the Bangladesh stock prices are impacted by numerous macroeconomic variables, which is in contrast with the UK as the latter is affected by macroeconomic variables to a much lesser degree. This disparity affects stock prices accordingly, and this could be because of the differences in the macroeconomic stability in Bangladesh and the UK. Bangladesh is a developing economy with numerous financial, environmental and administrative issues. In addition, there is limited expertise, market inefficiency, political unrest and clashes, which, in addition to natural disasters, impede the steady progress of the economy.

Similarly, investors in Bangladesh are not willing to put their money in the stock market, and these decisions are strongly impacted by rumors and noise trading, meaning the stock market is less efficient. Thus, problematic situations in macroeconomic aspects have a deep impact on the stock prices of Bangladesh for a substantial period of time. Conversely, the UK is a developed nation with a more genial business environment, and financial, political as well as institutional growth maintains macroeconomic stability. The UK has a historically robust market, which can counter negative events in a short time, with stable stock markets. Therefore, when these challenging instances occur, stock prices are affected less and for a smaller period of time, so stock prices in the UK are seen to be more insensitive to macroeconomic performance changes. Correspondingly, the UK stock market has solid ties with the US stock market, so when there is any substantial movement in the US stock market, then the UK stock market has an appropriate reaction. Consequently, the UK stock markets are even less related to UK macroeconomic performance than they otherwise would be.