Stochastic Frontier Model Approach for Measuring Stock Market Efficiency with Different Distributions

Abstract

The stock market is considered essential for economic growth and expected to contribute to improved productivity. An efficient pricing mechanism of the stock market can be a driving force for channeling savings into profitable investments and thus facilitating optimal allocation of capital. This study investigated the technical efficiency of selected groups of companies of Bangladesh Stock Market that is the Dhaka Stock Exchange (DSE) market, using the stochastic frontier production function approach. For this, the authors considered the Cobb-Douglas Stochastic frontier in which the technical inefficiency effects are defined by a model with two distributional assumptions. Truncated normal and half-normal distributions were used in the model and both time-variant and time-invariant inefficiency effects were estimated. The results reveal that technical efficiency decreased gradually over the reference period and that truncated normal distribution is preferable to half-normal distribution for technical inefficiency effects. The value of technical efficiency was high for the investment group and low for the bank group, as compared with other groups in the DSE market for both distributions in time- varying environment whereas it was high for the investment group but low for the ceramic group as compared with other groups in the DSE market for both distributions in time-invariant situation.

Portfolio efficiency analysis with SFA: the case of PSI-20 companies

“…These results support previous findings (e.g., Hasen et al 2012) that positive relationships between those input variables are common.…”

Efficiency of microfinance institutions in sub – Saharan Africa: a stochastic frontier approach

“…We specified a cost function using the Cobb-Douglas functional form as used in previous studies (Oteng-Abayie et al, 2011; Hasan, Kamil, Mustafa & Baten, 2012). Despite its known limitations, this functional form had an advantage in identifying growth patterns in the microfinance sector and it is simple in handling multiple inputs (Murthy, 2002).…”

Weak Form of Efficient Market Hypothesis – Evidence from Pakistan

“…For example, Mobarek (2000) rejected the Dhaka Stock Exchange sample for EMH. For the same stock market, Hasan et al (2012) also nullified the existence of weak form of efficiency for daily, weekly and yearly data over a period from . Similarly, Abeyratna and Power (1995 did not find weak form of efficiency at Colombo Stock Exchange for a sample of 20 companies for a sample period from 1990 to 2001.…”

“…While, another study by Mishra (2011) does not support random walk model for other developed markets (US, UK and Germany) and emerging economies (Brazil, India, South Korea, China, Russia). Economic researchers such as Mobarek (2000) and Hasan, Kamil, Mustafa, and Baten (2012) rejected weak form of efficiency for Dhaka stock exchange and Abeyratna and Power (1995) rejected for Colombo Stock Exchange.…”