TESTING THE EFFICIENCY MARKET HYPOTHESIS: AN EXAMPLE OD BOSNIA AND HERZEGOVINA

Abstract

Governments of many countries, companies and business organizations last decades increasingly pay attention and recognize the importance of the capital market for economic growth and development.
One of the factors that has strong influence on the capital market, as a platform for long-term borrowing and obtaining funds, is the price movement of financial instruments traded on capital market. The price movement of financial instruments is linked to the efficiency of the market, and is under strong influence of all available information about companies, which quickly reflect on the prices of financial instruments.
Fama (1965) was one of the first economist who used term „efficient financial market“. He conducteda research on the financial market and pointed out that in an efficient market, on average, competition would cause that all effects of the latest market information will be included through the value of shares traded.
The hypothesis of an efficient financial market suggests that the price of the shares, financial instruments, reflects all available information, so investor cannot realize extra profits if he has some certain insider information or on the basis of publicly available historical data and information. Many investors are trying to find those securities that are underestimated, and for which is expected to growth in the future. In a case of efficient financial market, it is quite impossible to find underestimated securities because information quickly incorporated into the price of securities.
Ttesting of the efficiency of financial market is largely present in the developed markets, while somewhat weaker tests have been carried out on the examples of transitional financial markets. In published researches it is most often confirmed that transition countries have or have had poorly performing financial markets, especially in the initial stages of their development (Bahmani-Oskooee et al, 2016; Kvedaras and Basdevant, 2002).
In this research we are testing the efficient market hypothesis for the financial market in Bosnia and Herzegovina. We tested hypothesis that the financial market is weakly efficient. For this test we are using stock index data from the Sarajevo and Banja Luka Stock Exchange, SASX10, BIRS and BATX index. The analysis includes daily, weekly and monthly index movements from 2006 to August 2018, for SASX 10 and BIRS indices, while BATX data is available from 2009 until August 2018. In the first step we calculate returns for all periods (deily, weekly and montly) between indicies and in another step we tested autocorrelation between their returns.
Efficient market hypothesis has been tested through three statistical tests: autocorrelation test, run test and variance test. The results obtained by applying different tests do not give a single answer to the question whether financial market in Bosnia and Herzegovina perform at a low level of efficiency. Auto-correlation tests reject the hypothesis of weak form market efficiency,
while the run test and the test of variance ratios confirm the weak form of market efficiency. Such findings suggest that it is not possible, with sufficient precision, to predict trends in the financial market in Bosnia and Herzegovina.