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The study examines the efficiency of the Philippine stock market using
stock price movements during the period July 1987 to May 2004.
Characterizing stock price movements as an AR(1) process with Laplace
residuals, the statistical evidence supports the hypothesis that the
Philippine stock market is weak-form efficient. An examination of major
events that could plausibly affect share prices and large price movements
from an event study perspective indicates fairly rapid absorption by the
market of information, except in cases of extreme stress caused by political
and economic shocks. Furthermore, factors other than information about
fundamentals appear able to cause major share price movements. Given
these, the support for the semistrong-form efficiency of the stock market is
mixed.
I. Introduction
This study examines the efficiency of the Philippine
stock market. The first part looks at the statistical
properties of stock price changes to determine
whether the stock market is weak-form efficient in
the sense of Fama (1970). The second part examines
semistrong-form efficiency, motivated by the study of
Cutler et al. (1989), using public information relating
to major events that could plausibly affect stock
prices. Cutler et al. chose the 50 largest daily changes
in the Standard & Poor 500 stock index and looked
for explanations in the following days New York
Times. They noted that ample evidence existed that
showed that share prices do react to news about
corporate and macroeconomic developments that
could plausibly affect fundamentals. This, as well as
the speed at which the information is incorporated in
prices, is examined in this study using event study
techniques. Event study techniques have been used to
evaluate the impact of political, economic and other
The Phisix is a market-value-weighted index of 30 representative companies from different sectors of the local bourse. Data
is from the Philippine Stock Exchange.
Applied Economics Letters ISSN 13504851 print/ISSN 14664291 online 2006 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/13504850500397437
463
R. Q. Aquino
464
1000
900
800
Laplace
density
700
Frequency
600
500
Normal
density
400
300
200
100
0.16
0.15
0.14
0.13
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.10
0.11
0.12
0.13
0.14
Residuals
Fig. 1.
Frequency distribution of AR(1) residuals with fitted normal and Laplace densities
Ordinary least squares (OLS), which is the best linear unbiased estimator even in the presence of non-normal errors, is used.
The first-order autocorrelation coefficient is also estimated using the least absolute deviation method which is the maximum
likelihood estimator when the errors follow the Laplace df (McDonald, 1996). The result is not statistically different from the
OLS estimate.
4
The Laplace distribution belongs to the family of elliptical distributions important in finance theory. See Johnson and Kotz
(1970) for an extensive reference on this distribution.
3
465
Normal
Laplace
Gamma (1)
Gamma (2)
KS statistic
Location parameter
Scale parameter
Variance
Variance ratio
No. of observations
Critical values:
0.05
0.01
0.0269
0.00007
0.0133
0.00018
n.a.
4313
0.0176*
0.00007
0.0122
0.00030
n.a.
4313
0.0105*
1.1127
0.0101
0.00011
1.0
4313
0.0251*
1.8924
0.0116
0.00026
2.18
2157
0.0207
0.0248
0.0207
0.0248
0.0207
0.0248
0.0263
0.0327
*The goodness of fit hypothesis is not rejected at both 0.05 and 0.01 significance levels. Critical values are from
Rohatgi (1976).
N
X
i1
jXi j
5
Alternatively, Linden (2001) showed that the Laplace distribution can be derived from a conditional normal distribution
with stochastic variance.
6
For events in the USA, the event day is the following day, Philippine time.
n.t. no trading.
Note: Values in bold are significant at least at the 0.05 level.
Event
Date
0.014
0.028
0.034
0.003
0.027
0.022
0.002
0.078
0.017
0.005
0.012
0.005
0.016
0.016
0.012
0.003
0.007
0.009
0.009
0.006
0.006
0.005
0.002
0.017
0.030
0.024
0.007
0.001
0.007
0.003
0.060
0.057
0.020
0.011
0.023
0.009
0.003
0.011
0.023
0.024
0.000
0.000
0.008
0.032
0.021
0.014
0.160
0.011
0.046
0.001
0.041
0.001
0.015
0.073
0.038
0.001
0.040
0.020
0.022
0.006
0.005
0.001
0.024
0.065
0.038
0.011
2/3
0.022
0.008
0.045
0.004
0.002
0.030
0.006
0.023
0.024
0.031
0.034
0.098
0.003
0.048
0.002
0.001
0.009
0.020
0.018
0.004
0.021
3/2
0.005
0.002
0.043
0.010
0.041
0.000
0.071
0.038
0.072
0.050
0.023
0.138
0.014
0.017
0.002
0.019
0.003
0.022
0.007
0.093
0.004
4/1
0.013
0.011
0.002
0.004
0.005
0.007
0.019
0.013
0.016
0.028
0.009
0.002
0.047
0.007
0.010
0.018
0.024
0.009
0.004
0.015
0.000
0.014
0.010
0.035
0.029
0.002
0.048
0.087
0.059
0.011
0.001
0.001
0.002
0.009
0.016
0.025
1/4
0.005
n.t.
0.002
0.003
0.003
0.018
0.014
n.t.
0.006
n.t.
0.002
0.003
0.032
0.013
0.006
0.001
0.014
0.002
n.t.
0.015
n.t.
0.017
0.021
n.t.
0.027
0.063
0.069
n.t.
0.003
0.005
0.003
0.001
0.000
n.t.
0.012
0.024
0/5
0.015
0.017
0.010
0.004
0.006
0.016
0.014
0.022
0.049
0.017
0.015
0.008
0.027
0.004
0.009
0.012
0.015
0.027
0.005
0.015
0.013
0.022
0.037
0.051
0.031
0.024
0.064
0.031
0.033
0.005
0.006
0.004
0.013
0.025
0.018
0.016
Mean Abs.
Resid.
0.268
0.178
0.602
0.953
0.873
0.244
0.328
0.066
0.000
0.196
0.243
0.725
0.013
0.952
0.699
0.471
0.261
0.017
0.897
0.293
0.393
0.073
0.002
0.000
0.009
0.030
0.000
0.009
0.006
0.906
0.906
0.967
0.362
0.040
0.170
0.252
P(YN y)
0.335
0.034
0.024
0.000
0.237
0.808
0.986
0.174
0.003
0.036
0.327
0.142
0.000
0.917
0.642
0.256
0.000
0.017
P(Y1 y)
466
R. Q. Aquino
467
Phisix
1708
0.161
1500
0.152
1146
0.151
819
0.148
1072
799
885
706
0.142
0.127
0.115
0.106
5
6
7
8
2072
0.098
2146
566
1200
738
1518
822
986
1948
1175
1075
1336
812
1269
862
757
803
0.096
0.093
0.091
0.089
0.088
0.086
0.084
0.081
0.078
0.078
0.077
0.076
0.075
0.075
0.075
0.075
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
2701
1340
0.072
0.072
26
27
688
2903
867
569
0.071
0.071
0.070
0.069
28
29
30
31
902
1437
0.069
0.068
32
33
615
738
1049
1017
1740
1043
810
2218
0.068
0.067
0.067
0.066
0.066
0.065
0.065
0.065
34
35
36
37
38
39
40
41
999
1235
907
1829
973
860
518
1459
0.064
0.064
0.063
0.063
0.062
0.062
0.062
0.062
42
43
44
45
46
47
48
49
1686
0.057
50
Residual
No.
R. Q. Aquino
468
Inverse DF
2
0.00
0.05
0.10
0.15
0.20
X MAX
Fig. 2.
^ respectively, where ^ is
approximated by ^ ln n and ,
the estimated scale parameter of the Laplace distribution discussed earlier. For n 4313, the expected
largest value, an, is 10.22%. Only eight of the top 50
movements have residuals larger than this value.
Denote the probability of observing the largest value
of the residuals greater than a value y as PYnn > y,
this is less than 0.01 only for the largest residual in
Table 3. There are also only five events for which
PYnn > y < 0:10: Thus, with the possible exception
of the top five events, the assumption that the Ys are
generated by the exponential distribution is given
additional support. As a further (albeit indirect)
support, Fig. 2 shows the quintile or QQ plot (see
Gumbel, 1958) of maximum values from a partition
of the sample into 43 non-overlapping sub-samples of
100 (101 for 13 sub-samples) against the inverse
Gumbel df. If the Gumbel distribution is the limiting
df of z, the plot must be approximately linear. This
appears to be the case in Fig. 2.
Table 4 groups the explanations into six general
categories. In a significant number (8) of the top
50 stock price changes, there were no major
political, economic or corporate news reported
that could have caused the market to move. In
an even more significant number of cases (12),
rumours or noise seemed to be the major factors
that caused prices to change. Cutler et al. noted
that a hypothesis that stock prices move in
response to news that is observable by market
participants but not by investigators studying the
market is obviously irrefutable. However, they
were sceptical of this possibility and argued that
news important enough to account for large swings
in the demand for stocks should be detectable in
economic statistics or in media reports. However,
some have suggested (e.g., Romer, 1994) that
EDSA is the name of the major road where protestors against the government congregated.
469
Event day
only
4 Days
before event
3
1
2
4
2
4
1
2
7
11
3
1
1
0
9
1
1
1
0
9
4
2
2
0
14
3
6
2
4
18
12
8
7
5
50
V. Concluding Remarks
The study showed that stock price movements in
the Philippines are better characterized by an AR(1)
process with residuals following the Laplace
distribution rather that the normal distribution
usually assumed. The statistical evidence appears
to support the hypothesis that the Philippine stock
market is weak-form efficient. An examination of
major events that could plausibly affect share prices
and large price movements from an event study
perspective indicates fairly rapid absorption by the
market of information, except in times of extreme
stress due to political and economic shocks that
appear to generate a great deal of market
uncertainty. Furthermore, factors other than information about fundamentals appear able to cause
major share price movements. Given these, the
support for the semi-strong-form efficiency of the
stock market is mixed.
5 Days
after event
Days before
and after event
Totals
Acknowledgements
The author is grateful to Roy Ybanez and Joel C. Yu
for their valuable comments.
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