Transition, the Evolution of Stock Market Efficiency and Entry into EU: The Case of Romania

In this paper we demonstrate that the measurement of stock market efficiency is an important activity in establishing whether eastern European countries satisfy the Copenhagen Criteria for EU membership. Specifically, we argue that developing an efficient stock market should be an important policy focus for countries with aspirations to join the EU as it helps to demonstrate the existence of a functioning market economy. We illustrate this issue by examining the evolution of stock market efficiency in the Bucharest Stock Exchange from mid-1997 to September 2002. We use a GARCH model on daily price data and model the disturbances using the Student-t distribution to allow for ‘fat-tails’. We find strong evidence of inefficiency in the Bucharest Stock Exchange in that the lagged stock price index is a significant predictor of the current price index. This result is robust to the inclusion of variables controlling for calendar effects of the sort that have been observed in more developed stock markets. The level of inefficiency appears to diminish over time and we find evidence consistent with stock market efficiency in Romania after January 2000.