Czech financial market efficiency in light of recent interest rate cuts

This article investigates the efficiency of the Czech financial market in v iew of the market's reaction to a recent series of interest rate cuts imple mented by the Czech central bank. An efficient market would, at least parti ally, anticipate interest rate cuts and rapidly adjust. While the domestic stock and foreign exchange markets generally do not react on the Czech Nati onal Bank's interest rate changes, changes to the central banks key repo ra te do affect Czech interest rates. In line with model expectations, the res ponse of the shorter rates is relatively stronger. The reaction of Czech in terest rates, however, appear to be grossly inefficient. Rate movements in anticipation of official rate changes are virtually absent. Moreover, adjus tments to rate changes take several days - even in the case of shorter rate s, which are influenced more directly by the central bank's repurchase rate it takes up to five working days to fully adjust to a rate change.