Greek market efficiency and its international integration

Political, economic and legal risks are among the causes of market inefficiency and the consequent under-development of financial markets. To further the understanding of the factors affecting market development, this study evaluates the Athens Stock Exchange (ASE). The Greek market provides a unique opportunity to isolate market efficiency as a factor in market development. Since its membership to the European Union (EU) in 1981, political and legal risks in the Greek market are similar to those of the other EU member countries such as the U.K., Germany and France. Greece's inclusion in the Eurozone in 2000 has eliminated many of the economic risks. The unrealized potential of the ASE is therefore questioned. Considering the relatively small number of stocks in the ASE, market level analysis is potentially inappropriate: studies may be rejecting the ASE's efficiency due to irregularities in a few influential stocks. Thus, this study analyzes the efficiency of the ASE by evaluating the market's, as well as individual stocks’, returns. A well documented anomaly for the ASE, the day-of-the-week effect, is evaluated as are return predictability tests including a runs test, causality from other markets, and causality from liquidity. Both on the market level and on the individual level, evidence of inefficiencies are found. Based on the evidence that about 94% of Greek stocks’ returns are Granger-caused by at least one foreign market, it is concluded that the Greek market lacks the appeal for international diversification. Overall, the ASE's unrealized potential is blamed on lingering market inefficiencies and especially on its causal relationship with international markets.