Czech parallel capital markets: discrepancies and inefficiencies

Jan Hanousek and Libor Nemecek

Applied Financial Economics, 2001, vol. 11, issue 1, 45-55

Abstract: This study concentrates on interactions, price convergence and co-movements among the organized (and parallel) markets in the Czech Republic. Significant and lasting price differences between the individual trading channels available to the investor are documented and they are attributed to the (inefficient) institutional structure of the Czech capital markets as these characteristics are not sensitive to the firms' characteristics. The central markets of the Prague Stock Exchange (PSE) and the RMS (over-the-counter system) represent the two most closely linked market channels. The interrelations between these markets are studied to identify the leaders and followers in the information transmission process. The analysis shows the leading position in actively traded stocks to be held by the PSE main market, but RMS dominates in segments with lower liquidity. The analysis of the intramarket relations also confirms that liquid segments play a leading role in both the PSE and RMS. Given the unpleasant evolution of the Czech capital markets and contrary to the theory, these links actually weaken over time as a smaller fraction of total trade is being transacted on these price-forming markets. Thus, we conclude that the PSE and the RMS do not behave as a fully integrated and efficient market. Major institutional changes are identified as the only mitigating force which has led to the deteriorating position and reputation of the Czech capital markets and the Prague Stock Exchange in particular.

Date: 2001
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DOI: 10.1080/09603100150210255

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