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Financial Market Efficiency in a Developing Economy: The Turkish Case

The primary objective of this paper is to test informational efficiency of the financial market in a developing country, namely Turkey. Semi-strong form efficiency in stock market, foreign exchange market and interbank money market is investigated by using the direct Granger-causality tests. The paper reports significant deviations from efficient market hypothesis with respect to changes in market liquidity in all markets above for the period January 1989 to July 1995. It is also found that these markets are pairwise interdependent. However, market liquidity cannot be predicted by using developments in the financial market. The results of the paper have three major implications. First, domestic investors as well as foreign investors may benefit from the empirical results of the paper to develop profitable trading strategies since all information variables are low-cost and readily accessible. This result is of particular importance to the investors of the European Community (EC) due to the Customs Union Agreement, which has been effective on 1 January 1996, between Turkey and the EC. Second, market participants cannot anticipate market liquidity by using financial market information. This is important for monetary policymaker in accommodation of daily market liquidity. Third, resources do not seem to be devoted to their best alternatives available; i.e., allocative efficiency appears to remain unachieved. * * BALABAN and KUNTER are researcher and assistant economist, respectively, with the Central Bank of the Republic of Turkey (CBRT). Any opinions expressed herein are strictly those of the authors alone and not necessarily those of the CBRT. Helpful comments on an earlier version in Turkish from Cem Aysoy, Hüseyin Çilli, Nuran Gökbudak and Cevriye Özcan are gratefully appreciated. Special thanks are due to H. Baturalp Candemir, co-author of the above unpublished version, which was offered second award by the Capital Markets Board, Ankara, Turkey in 1995 Research Competition, from which this article has partly been derived (see Balaban et al. [1996c]). We also thank Miyase Alkan and Feleknaz Balkılıç for their careful preparation of this discussion paper in electronic form. The usual disclaimers apply. Applied Economics Letters.