Development of stock market pricing in Central and Eastern Europe through two decades after the transition

In this paper we investigate the development of capital market pricing in six Central and Eastern European (CEE) post-communist countries (the Czech Republic, Estonia, Hungary, Poland, Romania and Slovakia) in the two decades after the change of regime. To make the results for these markets directly comparable with those for other developed markets we incorporate four developed countries as well: Austria (also representing the geographic, but not the socio-economic CEE region), Germany, United Kingdom, and the USA. We find that the Central and Eastern European stock market indexes investigated have shown continuous development in terms of a weak form of market efficiency during the past two decades. The results of the runs tests show that the null hypothesis of randomness can be rejected typically prior to 2000; however, since then, the daily returns of the indexes follow a random walk process. We find that, in the case of the largest CEE stock exchange, the Warsaw Stock Exchange in Poland, this development was quicker. The results of the variance ratio analyses coincide with these findings: comparing the test results for 1991–2003 and 2004–2011, the non-unit variance ratios disappear or at least their significance levels decrease. It is an interesting fact that both runs tests and variance ratios indicate higher efficiency for the indexes calculated in USD instead of local currencies.