The relationship between economic factors and equity markets in Central Europe

This paper investigates the possibility that newly-emerging equity markets in Central Europe exhibit semi-strong form efficiency such that no relation ship exists between lagged values of changes in economic variables and chan ges in equity prices. We find that while there are connections between the real economy and equity market returns in Poland and Hungary, these links o ccur with lags, suggesting the possibility of profitable trading strategies based on public information and rejecting semi-strong efficiency. For the Czech Republic the situation is:more complex. In recent periods, little con nection exists between lagged economic variables and equity market returns. Although this finding might be viewed as consistent with semi-strong effic iency, in fact there is also little connection between current economic val ues and stock prices in the Czech Republic. Thus, instead of processing inf ormation efficiently, the Czech market appears to be entirely divorced from the real world. It is suggested that the difference in. the current status of these markets may be due to the different methods by which they were cr eated. JEL classification: E44, G15, O16.