Utrecht University

Utrecht School of Economics

Bachelor Thesis

COMPARATIVE MARKET EFFICIENCY

A comparison of the efficiency of the Dutch and Italian stock markets

Authors:
Erik P. van der Heijden
Ellen W.H. Klijnstra

Supervisor:
Luigi F. Pinna
Group supervisor:
Peter O. van der Meer

ABSTRACT: In this thesis we test if one stock market can be more efficient than another. We
analyze the Dutch and Italian stock markets and compare them in terms of efficiency. A test is
conducted for the weak-form of efficiency and the results are interpreted. We find that the
Italian stock market is relatively more efficient than the Dutch stock market due to differences
in the degree of information disclosure, market composition, and historical and cultural
development of the two stock markets.

KEYWORDS: Efficient Market Hypothesis, Stock market, Information disclosure, Abnormal

returns

This bachelor thesis is composed to fulfill the graduation requirements for the
Bachelor Economics & Business Economics at Utrecht School of Economics.
24th of June, 2014

Acknowledgements
We would like to thank Luigi F. Pinna MSc, our thesis supervisor, for his support,
guidance, suggestions, feedback and help during our process of doing research and
writing this thesis. We would also like to thank drs. Peter O. van der Meer, our
group supervisor, for his time, feedback and insightful group meetings.
Furthermore, we would like to express our appreciation to our fellow students for
their peer-review and constructive criticism.

Table of Contents
List of Figures ....................................................................................................................................................iv
List of Tables ....................................................................................................................................................... v
List of Equations................................................................................................................................................vi
1.0

Introduction............................................................................................................................................ 1

2.0 Theoretical Background............................................................................................................................. 2

2.1 What Is Market Efficiency ........................................................................................................ 2
2.2 Development Of The Efficient Market Hypothesis ................................................................... 3
2.3 Why Compare Netherlands and Italy ........................................................................................ 5
2.4 Evolution Of The Dutch and Italian Stock Market .................................................................... 6
2.5 Mechanism Of The AEX and FTSE MIB ................................................................................. 8
3.0 Data Description ....................................................................................................................................... 11
3.1 Data ......................................................................................................................................... 11
3.2 Portfolio NL............................................................................................................................. 13
3.3 Portfolio IT .............................................................................................................................. 14
4.0 Empirical Research .................................................................................................................................. 15
4.1 Methodology............................................................................................................................ 15
4.2 Testing ..................................................................................................................................... 16
4.3 Results ..................................................................................................................................... 21
4.3.1 Results Of Portfolio NL........................................................................................................ 21
4.3.2 Results Of Portfolio IT ......................................................................................................... 22
4.3.3 Comparative Results Of Portfolio NL and Portfolio IT ....................................................... 23
5.0 Interpretation Of Results ................................................................................................................... 24
5.1 Mechanism Of AEX and FTSE MIB ...................................................................................... 24
5.2 Composition Of Portfolio By Industry .................................................................................... 25
5.3 Information Disclosure and Transparency............................................................................... 27
5.4 Cross-Listings and Time Zones ............................................................................................... 28
5.5 Cultural Differences ................................................................................................................ 29
6.0 Conclusion and Recommendation .................................................................................................... 31
Bibliography ..................................................................................................................................................... 32

List of Figures
Figure 1: Graphical representation of regression of historical returns of Aegon vis--vis
historical returns of AEX
Figure 2: Normal Distribution of Portfolio NL
Figure 3: Normal Distribution of Portfolio IT
Figure 4: Degree of information disclosure in the Netherlands and Italy
Figure 5: Percentage of individuals in the Netherlands, European Union, and Italy who use
internet banking from 2005 through 2013

List of Tables
Table 1: Example of historical prices and return
Table 2: Composition of the Dutch portfolio
Table 3: Composition of the Italian portfolio
Table 4: Regression of historical returns of Aegon vis--vis historical returns of AEX
Table 5: Cumulative abnormal returns for Portfolio NL ranked from smallest to largest
Table 6: Cumulative abnormal returns for Portfolio IT ranked from smallest to largest
Table 7: Mean and standard deviation of Portfolio NL and Portfolio IT
Table 8: Rules for selection
Table 9: Industry division of Portfolio NL and Portfolio IT
Table 10: Time zones in which Portfolio NL and Portfolio IT are present in, indicated with the
number of companies

List of Equations
Equation (1): Index value of the AEX

=1 , , , , ,
=

Equation (2.0): Index value of FTSE MIB

It = Mt / Dt
Equation (2.1): Total free float adjusted market capitalization
=

Equation (2.2): Investable Weighting Factor

IWF = 100% - sum of the % of shareholders held by restricted shareholders
Equation (3): Capital Asset Pricing Model
= + +
Equation (4): Trend line
= 0.0016269 + 1.614483
Equation (5): Abnormal returns
AR = Y
Equation (6): Abnormal returns extended
AR = Y ( + irm)

1.0 Introduction
It goes without question that capital markets are integral to the monetary wealth of the modern
Western world. From the inception of the first limited-liability joint stock company in the
seventeenth century to the electronic trading floors of the twenty-first century, the buying and
selling of securities has been of great importance to the flow of capital in and out of numerous
countries. Despite the importance of these markets in 2014, their innate nature is still under
debate. Perhaps one of the largest contributions to the understanding of capital markets is the
Efficient Market Hypothesis which loosely states that stock prices at any given time reflect all
relevant information. While a number of economists agree with the basis of this hypothesized
nature of capital markets, there is empirical evidence indicating that not all capital markets are
perfectly efficient at all times. Taking into consideration that a stock market is nearly
perfectly efficient, but does not indeed reach efficiency perfection, we ask about the
comparative nature of stock markets. It is the intention of this thesis to investigate if one stock
market can be relatively more efficient than another.
We conduct our research by comparing the market efficiency in the weak form of the Dutch
stock market and the Italian stock market. Our investigation is structured in the following
manner. Section 2 discusses the theoretical background of our research question. Section 3
defines the data used to conduct our analysis. Section 4 describes the methodology used to
conduct our empirical analysis which is followed by our empirical test and results. Section 5
interprets the results of our empirical analysis according to different factors. Finally, Section 6
concludes this thesis.

2.0 Theoretical Background

This section lays the foundation for the theoretical background of the Efficient Market
Hypothesis and how it is used in our thesis. In Section 2.1 we discuss what exactly the Efficient
Market Hypothesis is. In Section 2.2 we talk about how this theory has developed over time. In
Section 2.3 we justify the comparison of the Netherlands to Italy. In Section 2.4 we compare
how the Dutch and Italian stock markets have been constructed from their beginnings to 2014.
In Section 2.5 we analyze the inner workings of the index representative of the Dutch stock
market, the AEX, vis--vis the representative Italian stock market index, the FTSE MIB.
2.1 What Is Market Efficiency?
If investors had the ability to predict the future intrinsic value of a security, they would be able
to earn unprecedented profits from even the slightest price movement. The price of a security
moves upward or downward in response to new information, or news, which by definition is
unpredictable. This implies that the movement of stock prices themselves is unpredictable.
Kendall and Hill (1953, p. 11) reiterate this by stating that, An analysis of stock-exchange
movements revealedthere is no hope of being able to predict movements on the exchange.
This stock price unpredictability is encompassed in the concept of the random walk which
requires that the expected value of a stock movement is zero due to the equal probability that it
may move up or down. If prices are determined rationally, then only new information will
cause them to changeA random walk would be the natural result of prices that always reflect
all current knowledge (Bodie, Kane, & Marcus, 2011, p. 372).

Empirical evidence from economists such as Kendall and Hill (1953), Cootner (1964), and
Fama (1965) leads to the observation that stock prices reflect available and relevant information
and that they are unpredictable. This characteristic of securities markets is known as the
Efficient Market Hypothesis. From its inception in the twentieth century through its
development into the twenty-first century, the Efficient Market Hypothesis has been the main
source of explanation for the valuation and movement of stock prices in securities markets. This
hypothesis exists in three relevant forms which attempt to explain market efficiency through
three varying perspectives on what qualifies as all available and relevant information.
The weak-form of efficiency takes into account the historical prices of a security. The weakform hypothesis asserts that stock prices already reflect all information that can be derived by
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examining market trading data such as the history of past prices, trading volume, or short
interest (Bodie, Kane, & Marcus, 2011, p. 375). From this form of efficiency, it can be implied
that any analysis on price trends will result in zero profits. If a profitable trend is spotted, it will
be exploited by all other investors who, theoretically, have access to the same historical price
information which is virtually costless. An arbitrage opportunity that is exploited will drive the
price of a security to its intrinsic value with buy or sell signals in accordance to the securitys
supply and demand. In a rational market, a security whose market value is equal to its intrinsic
value cannot be used to earn profit because its price will not deviate from its current and
accurate position

The semi-strong form of efficiency takes into account all public information about the firm that
is issuing a security. Such information includes, in addition to past prices, fundamental data
on the firms product line, quality of management, balance sheet composition, patents held,
earning forecasts, and accounting practices (Bodie, Kane, & Marcus, 2011, p. 376). Public
news on factors such as these which can affect the profitability of a firm, and thus the value of
its stock, is by definition unpredictable. According to the semi-strong form of efficiency, this
firm-specific information is reflected in stock prices. The unpredictability of this information
eliminates guaranteed opportunities to profit on speculation.
The strong-form of efficiency takes into account all private information about the firm that is
issuing a security. This form also includes public information and historical prices. The strongform of the efficient market hypothesis states that stock prices reflect all information relevant
to the firm, even including information available only to company insiders (Bodie, Kane, &
Marcus, 2011, p. 376).
2.2 Development Of The Efficient Market Hypothesis
The conceptualization of the Efficient Market Hypothesis dates back as far as the turn of the
twentieth century, but throughout its history it did not always have the same title. In his 1900
work, Louis Bachelier identifies that events from the past, the present, and discounted for the
future are reflected in the price of an asset but they are not apparently correlated to price changes
(Cootner, 1964). This empirical finding was discovered in a time when economists did not have
regular access to computer technology to easily run calculations for lengthy sets of data.
Decades later, Kendall and Hill (1953) used more advanced methods of computation and built
upon this previous study on historical price autocorrelation. In their publication, they enquire
whether the so-called trend in a series was in fact separable from the short-term movements, or
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whether it should be regarded as generated by a set of forces which also gave rise to the shortterm movements (Kendall & Hill, 1953, p. 11). Their findings indicate that movements in a
stock market show noticeably little serial correlation and little lag correlation among series.

Up to the mid-twentieth century, the observation that security prices have no significant,
statistical relationship with their past prices was tested by numerous economists. It was not until
the critically acclaimed work by Fama (1965), that markets were defined as efficient for the
first time. In later works, Fama (1970) further elaborates on stock market behavior. He argues
that security prices at any time fully reflect available information, and are thus efficient. Fama
(1991) continues to do a review and extension on his work of 1970. In this paper he analyzes
the efficient market hypothesis according to the following factors: event studies, private
information and return predictability. His findings on the topic of event studies are that stock
prices adjust quickly to information. Concerning private information, he states that insider
trading now plays a major role in testing for market efficiency, and he touches upon the topics
of portfolio management and security analysis which have become more important variables in
measuring the extent to which private information is available. The results of his study on return
predictability unveils that looking at the long-horizon stock returns, predictability from past
returns are not possible and that there is no autocorrelation. However, he finds that based on
other variables, such as price to earnings ratios, dividend yields and default spreads of lowover high-grade bond yields, it is possible to predict returns.

While theories on market efficiency throughout the twentieth century are strongly developed,
not all economists agree, and offer counterevidence to the argument. Basu (1977) questions the
validity of the Efficient Market Hypothesis by showing empirical evidence of the systematic
bias of particular securities. The author concludes that from April 1957 through March 1971,
stock portfolios with relatively low price-to-earnings ratios display on average higher absolute
and risk-adjusted rates of return than high price-to-earnings portfolios. The fact that a bias of
any kind of security exists is a contradiction to the Efficient Market Hypothesis. Tversky and
Kahneman (1986) continue to counter argue the Efficient Market Hypothesis by questioning
the assumptions that investors are rational. Rationality of actors in the stock market is integral
to the Hypothesis because it makes the demand and pricing of securities unbiased by erratic
decision making. Pertaining to human behavior deviating from rational behavior, Tversky and
Kahneman (1986) state that, The deviations of actual behavior from the normative model are
too widespread to be ignored, too systematic to be dismissed as random error, and too
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fundamental to be accommodated by relaxing the normative system. Laffont & Maskin (1990)
argue that imperfect information on capital markets can lead to a violation of the strong form
of the Efficient Market Hypothesis. By releasing limited, select information, or by otherwise
conducting insider trading, investors on the stock market can misconstrue the real price of an
asset, thus going against the main principle that a price reflects all relevant information. The
Efficient Market Hypothesis makes the assumption that all actors in a market behave within
their legal parameters, but crimes such as insider trading still exist. Maikel (2003) also states
his disagreement with the Efficient Market Hypothesis. He argues that investors are irrational
and that pricing irregularities and patterns can persist over given periods of time. He does not
condone the absolute abandonment of the Efficient Market Hypothesis, but he does claim that
it can be further sophisticated.

Throughout its development, the Efficient Market Hypothesis has been both strengthened and
countered by numerous economists. Vast amounts of research have gone into the subject, but
there is still disagreement in the academic community. Even the Nobel Prize in Economic
Sciences was given to economists that have opposing perspectives on the same concept. The
press release from the Royal Swedish Academy of Sciences, in awarding the Sverges Riksbank
Prize in Economic Sciences in Memory of Alfred Nobel for their empirical analysis of asset
prices states that, These findings, which might seem both surprising and contradictory, were
made and analyzed by this years Laureates, Eugene Fama, Lars Peter Hansen and Robert
Shiller (The Royal Swedish Academy of Sciences, 2013). If even these Nobel laureates cannot
agree on the validity of the Efficient Market Hypothesis, then there is still room for more
development.
2.3 Why Compare Netherlands and Italy
The Efficient Market Hypothesis has a strong degree of legitimacy, but it is not universally
agreed upon. Based on the assumption that markets can display efficiency, but are not
necessarily perfectly efficient, present economic theory would indicate that one stock market
can be more efficient than another stock market. Bodie, Kane and Marcus (2011) state that, It
would not be surprising to find that the degree of efficiency differs across various markets. In
order to test this notion in a controlled experiment, we use the stock markets of the Netherlands
and of Italy. The Netherlands and Italy use the same currency, are both currently in the same
European Union, and are both in the same time zone. The two nations have developed Westernstyle capital markets which were established hundreds of years ago, and thus have both
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developed parallel to one another. The stock markets of the Netherlands and of Italy display
many similar characteristics, thus we would expect them to display the same degree of market
efficiency.

2.4 Evolution Of The Dutch and Italian Stock Market

In a modern age of quickly-growing globalization and national economic interdependence,
capital flows within and between countries have become highly relevant. A capital market is an
integral component to most nations wealth and has become more so since their creation in the
early seventeenth century. Still, economists in the twenty-first century have difficulty agreeing
universally on this type of markets behavior and its innate characteristics. Although both the
Dutch and Italian stock markets in 2014 are well established and internationally oriented, they
have different histories of development.

The origins of the Dutch stock market go back to 1602 when the Vereenigde Oostindische
Compagnie (VOC) was founded. It was the first large limited-liability joint stock company in
the world and was in many respects seen as the first ever initial public offering. According to
de Jong & Rell (2005), By the middle of the seventeenth century the Netherlands had
developed an active shareholding culture, with speculation in VOC shares and even derivatives
trading a widespread popular pursuit. The Golden Age was a flourishing era for the Dutch
stock market, where wealth was also invested on an international level in government securities.
As de Jong & Rell (2005) state in the words of Peter Hgfeldt, The free city of Amsterdam
provided the fertile ground for the rst modern hub of international nancial markets and
advanced intermediation. In 1799, when the VOC declared bankruptcy, wealth and confidence
in the Dutch stock market diminished. This decline in stock market liquidity was also due to
French occupation of the Netherlands between 1795 and 1813. The Netherlands was lagging
behind in the industrial revolution comparing to its surrounding countries, especially the UK.
A period of reduced economic growth and stagnation followed and went along with low activity
on the capital market. Finally when the industrial revolution got off the ground in the
Netherlands in the late nineteenth century, there was a revival in the Dutch stock market.
Industrial development started coming to life in the second half of the nineteenth century, with
new shareholder capital raised for a number of enterprises such as railway construction (de
Jong & Rell, 2005, p. 469). The main actors in the capital market were members of the
founding families and wealthy individuals who brought in the capital.

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Throughout the nineteenth century the Amsterdam Stock Exchange was an active and
sophisticated market. It brought large savings to the market and its open and competitive
character led to an increase in unrestricted public access. However, it was still the case that the
trading elite of Amsterdam played a major role in financing and the industrialization. In the
early twentieth century the Amsterdam Stock Exchange established a physical trading floor
called the Beursplein 5. During this time, Beursplein 5 grew to be the financial center of the
Netherlands, and functioned as a trading floor for 85 years. In 1983 the Amsterdam Exchange
indeX, AEX, was introduced and functioned since then as the main index of the Amsterdam
Stock Exchange.

In the beginning of the twentyfirst century, the Amsterdam Stock Exchange entered a new era
after 400 years of business. The trading floor became automated and transactions were present
in international capital markets through digitalization and world wide acces (Euronext, 2014).
In the year 2000, the AEX, together with the UK, Portugal, France and Belgium, created the
first pan-European exchange called the Euronext. The Euronext became a stock exchange
which consisted of several of the largest indices of each its particiating countries. Its purpose
was to be an internationally oriented stock exchange and to benefit from the harmonization of
the European Union with respect to financial markets. In 2007, the Euronext merged with the
New York Stock Exchange Group, forming Euronext NYSE which was the first global stock
exchange.

By the time the Dutch stock exchange was already established as a progressive pioneer, the
Italian stock market had only come into development in 1808. With the help of Eugenio
Napoleone the Milan Securites Exchange was inaugurated. Unlike the free-market AngloSaxon system of stock exchange, the Milan Securities Exchange was created by the government
and subject to the Napoleonic Code of Trade until 1998 (Paletta, 2007). The stock exchange in
Milan, similar to Rome, Turin and Genoa, was one of many independent, local exchanges in
Italy during its time of political fractionalization before 1946. Aganin & Volpin (2005, p. 334)
state that, The absence of regulation oered speculators wide opportunities to prot and kept
uninformed investors (and liquidity) away. The turning point for the MSE came with the intense
industrialization push between 1895 and 1907. The industrial revolution began quite late in
Italy, but boosted the Milan Stock Exchange. The number of traded companies increased, banks
became more active and the government showed a direct presence in the Italian economy.

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In 1918, this period of growth and prospertity slowed down and the Milan Stock Exchange
became Italys main stock exchange. Aganin & Volpin (2005, p. 336) describe this turning
point by stating that, One important cause of the end of the period of growth for the stock
market was the lack of protection for minority shareholders. There was a general market
perception that universal banks and managers like Agnelli used the investment boom early in
the century to pump and dump their shares. Further, the drastic increase of dividend taxation at
company and personal level introduced by the fascist government made investment in the stock
market even less attractive. In the twentieth century the stock exchange was marked by first
privatizations of companies and industries, liberazation of capital markets. It also began to
witness low legal enforcement, low legal investor protection, high ownership concentration and
family capitalism which were strongly conncected to political power. Underdeveloped
institutional characteristics and the presence of politics in the financial market made the capital
market an underdeveloped one and the general public shied away from entering. Another issue
was the increase of public debt. This debt was due to state-owned enterprises who
malfunctioned in terms of inefficient production technologies, misallocation of resources and
weak managerial incentives, to name a few. These losses were financed by the government with
public debt. In the 1990s, when the public debt drifted out of control, a privatization program
was introduced (Aganin & Volpin, 2005). In 1998, the Milan Stock Exchange was privitzed
and was thus titled the Borsa Italiana.Since 1998, the Borsa Italiana has converged into a welldeveloped and international oriented stock market that is on its way to position itself strongly
on the competitive global market. In 2007, the Borsa Italiana and the London Stock Exchange
merged and formed the London Stock Exchange Group. The purpose of the creation of London
Stock Exchange Group is to form a well-diversivied European exchange group with a core
function of bringing together companies who seek capital with investors from all over the
world. Two years later, in 2009, the index FTSE MIB was created, which was before managed
by the the S&P MIB, and functioned since that time as main index for the Italian stock market.

2.5 Mechanism Of The AEX and FTSE MIB

In order to measure the Dutch and Italian stock exchange, we use indices as proxies. An index
has specific working and rules of composition and operating, thus we discuss both of the indices
use in our empirical testing: the AEX to represent the Netherlands and the FTSE MIB to
represent Italy.

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The AEX consists of the 25 largest weighted companies listed on the Amsterdam Stock
Exchange in terms free float market capitalization ranking. Free float market capitalization is
the outstanding capital of a company that should be freely available for trading. Shares held by
insiders of a company, government holdings and holdings of particular companies are not
considered as free float. Also shares held by pension funds and mutual funds fall outside free
float (NYSE Euronext, 2014). Market capitalization is the total market value of a companys
outstanding shares. Hence, a company is eligible for entering the AEX index when its free float
is 15%, meaning that 15% of its outstanding shares should be freely available for trading.
Additionally, the free float velocity should be 25%, meaning that their actual trading volume
should be at least 25% of the total shares listed for trading. The capping of the AEX is 15%,
which means that no single company of the index can comprise more than 15% of the index.
The index is based on a price return basis of the companies, which is based on equation 1.
=

=1 , , , , ,

(1)

Where the variables denote the following; t is the time of calculation, N is the number of
constituent equities in index, Qi,t is the number of shares of equity i included in the index on
day t, Fi,t is the free float factor of equity i, fi,t is the capping factor of equity i, Ci,t is the price
of equity i on t, Xi,t is the current exchange rate on t and dt is the divisor of the index on day t.
We have chosen for the AEX to represent the Netherlands because this is the largest index of
Dutch indices and is representative of the Dutch equity markets and economy. The AEX
consists of the largest 25 companies listed on the Amsterdam Stock Exchange, the AMX is next
with the second 25 largest listed companies, and the AScX represents the shares of the third
largest 25 companies (NYSE Euronext, 2014). Although the AEX index consists of 33% of all
listed Dutch companies, since these are the largest companies its market capitalization is 55%
of the domestic market capitalization (tradimo Ltd., 2014)[1]. Since data on market
capitalization is not regularly available for the Dutch stock market, we have based this number
on data available in the year 2011.

The FTSE MIB index is comprised of the 40 most liquid companies listed on the Borsa Italiana.
The index is the primary benchmark index for the Italian equity markets, capturing
approximately 80% of the domestic market capitalization (London Stock Exchange Group,
2013, p. 3). The weighting factor of the FTSE MIB is the same as the AEX in that is based on
free float market capitalization and the index is also capped at 15%. For entering the index,
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companies must fulfill the requirement of a free float percentage of at least 15%, but no rules
are set out for free float velocity as the AEX does.

Furthermore, the FTSE MIB is based on a price return basis of the companies which is follows
Equation 2.0. This is the same equation for the FTSE MIB as for the AEX, but different
notations are used.
It = Mt / Dt

(2.0)

Dt is the value of the index divisor at time t.

Where Mt

= total free float adjusted market capitalization at time t, which equals:

(2.1)

Where the variables denote the following; pit is the last traded price at time t, of the ith share,
qit is the number of shares in the index.
IWFit is the Investable Weighting Factor (adjusted for capping) for the ith share:
IWF = 100% - sum of the % of shareholders held by restricted shareholders

(2.2)

We have chosen for the FTSE MIB since this index is the primary index for the Italian stock
market, representing, as mentioned before, 80% of the Italian stock market, what we consider
as a significant sample.
Chapter 5 discusses more features of both indices, in order to explain differences and
similarities of the AEX and FTSE MIB. At this point, an understanding of these basic concepts
about composition, weighting factors and the general index equation is enough to have
knowledge about the mechanisms of the indices.

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3.0 Data Description

This section discusses the data we use for our empirical test. Section 3.1 explains the data we
need for our regressions and calculations for abnormal returns, where section 3.2 and 3.3
present the Dutch and Italian Portfolio respectively.
3.1 Data
For our comparative study, we test and analyze the Dutch and Italian stock markets. In order
to make this measurable, we make portfolios for each country and use them as proxies for
their stock markets. These portfolios can be seen as a sample from which we infer results for
the population. We choose to use the most representative index of each country, respectively
the AEX index for the Netherlands and the FTSE MIB for Italy. The companies in these
indices are taken into account for our research. For an overview of the portfolios, see Sections
4.2 and 4.3.

For our empirical research, testing for the weak form of efficiency is done by testing for
abnormal returns. An abnormal return is the difference between a stocks actual return and its
expected return. For the actual return we gather data from Yahoo Finance which consists of
historical prices on a daily basis. Our research is based on the daily stock returns of all
companies listed in both indices, 65 companies, from 4 January 2000 through 23 April 2014.
A stock return in our research is considered to be the percentage change in a stocks market
price from one day to the next. The time span of our data begins on the second trading day of
the year 2000 in order to begin with a meaningful stock return for that year. We take the year
2000 as a starting point since in 1998 the Italian stock market privatized and there is a lack of
data in the years 1998 and 1999. Data for our selected companies are regularly available on
http://finance.yahoo.com.

With the daily historical prices given, we are able to calculate the actual stock return obtained
each day. We calculate the daily return for the index as well as for each individual company of
the index. The reason we do this is that we want to have data as well for the index, to use this
as a benchmark and be able to compare the performance of an individual company to its index.
As table 1 illustrates, the daily actual returns are calculated for the Dutch index, the AEX, and
for an individual company in this portfolio, Aegon. This method is applied to all companies in
both portfolios for every day between 2000 and 2014. An important note on a flaw of our data
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is that not all stock prices, and thus not all stock returns, are available for all companies. Gaps
exist in our data due to the fact that some companies have released more price information than
others. The maximum number of observations of stock returns for any given company in our
research is 3678.
Table 1: Example of historical prices and return
Date

AEX (AEX)

Aegon
(AGN.AS)

Adjusted

Change

closing price

adjusted closing closing price

adjusted closing

price

price

04-01-2000

642.25

05-01-2000

632.31

in Adjusted

Change

in

3.92
-0.015476839

3.77

-0.038265306

Source: Yahoo Finance

With these closing prices and returns we are able to make further calculations and regressions
in order to calculate the expected return. This is explained in more depth in Section 4.1 and
4.2. The described literature of Section 2.2 is applied to set the foundations of our research.
Our empirical testing is based on our data which is a time series. Data output that is not given
in the associated section is available on request.

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3.2 Portfolio NL
In this section the composition of the Dutch Portfolio is given. As a recap, the AEX consists of
the 25 largest companies listed on the Amsterdam Stock Exchange as of April 2014. They are
presented in an alphabetical order.
Table 2: Composition of the Dutch portfolio
Companies listed in the AEX
Dutch stock market (25 companies)
1.)

Aegon

20.)

TNT Express

2.)

Ahold

21.)

SBM Offshore

3.)

Akzo Nobel

22.)

Unibail-Rodamco

4.)

ArcelorMittal

23.)

Unilever

5.)

ASML

24.)

Wolters Kluwer

6.)

Boskalis

25.)

Ziggo

7.)

Corio

8.)

Delta Lloyd

9.)

DSM

10.)

Fugro

11.) Gemalto
12.)

Heineken

13.)

ING Group

14.)

KPN

15.)

Oci

16.)

Philips

17.)

Randstad Holding

18.)

Reed Elsevier

19.)

Royal Dutch Shell

Source: AEX (2014)

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3.3 Portfolio IT
The composition of the FSTE MIB is presented in this section. All companies are listed in an
alphabetical order as they are present in the index in April 2014.
Table 3: Composition of the Italian portfolio
Companies listed in the FTSE-MIB
Italian stock market (40 companies)
1.)

A2A

25.)

Moncler

2.)

Atlantia

26.)

Pirelli & C

3.)

Autogrill

27.)

Prysmian

4.)

Azimut Holding

28.)

Saipem

5.)

Banca Monte dei Paschi di Siena

29.)

Salvatore Ferragamo

6.)

Banca

Popolare

dell'Emilia 30.)

Snam

Romagna

31.)

STMicroelectronics

7.)

Banca Popolare di Milano

32.)

Telecom Italia

8.)

Banca Popolare

33.)

Tenaris

9.)

Buzzi Unicem

34.)

Terna

10.)

Campari

35.)

Tod's

11.)

CNH Industrial

36.)

UBI Banca

12.)

Enel

37.)

UniCredit

13.)

Enel Green Power

38.)

Unipolsai

14.)

Eni

39.)

World Duty Free

15.)

Exor

40.)

YOOX

16.)

Fiat

17.)

Finmeccanica

18.)

Generali

19.)

GTECH

20.)

Intesa Sanpaolo

21.)

Luxottica

22.)

Mediaset

23.)

Mediobanca

24.)

Mediolanum

Source: Borsa Italiana (2014)

14 | P a g e

4.0 Empirical Research

This section describes the process of our empirical research. Section 4.1 explains the
methodology we use conduct our experiment. Section 4.2 walks through the mechanics of the
empirical test. Section 4.3 discusses the results of the empirical test.
4.1 Methodology
In a perfectly efficient and rational stock market which is subject to the weak-form of the
Efficient Market Hypothesis, all returns of all companies are expected (i.e. normal) returns. The
first step of our empirical testing procedure is to determine if one portfolio has a greater amount
of unexpected (i.e. abnormal) returns than another, and then to make further conclusions based
on these values. Prevailing economic theory indicates there should be no difference in
efficiency between two stock markets. We thus come to the following null and alternative
hypotheses:
H0: There is no difference between the weak-form efficiency of two stock markets.
HA: There is a difference between the weak-form efficiency of two stock markets.
To test for abnormal returns, we begin with the Capital Asset Pricing Model, also known as
CAPM. The CAPM is a set of predictions concerning equilibrium expected returns on risky
assets (Bodie, Kane, & Marcus, 2011, p. 308). With this model, it is possible to formulate an
educated prediction on the expected return of an asset given the risk-free rate of treasury bills,
the assets degree of sensitivity to macroeconomic conditions (i.e. beta-coefficient), and the
return of the assets market. With these variables, the following equation can be made:
= + +

(3)

In Equation (3), ri, is the expected return of asset i. The variable, , is the rate of return of asset
i when the market return is equal to zero. The coefficient, , is the degree of sensitivity of asset
i on its respective market. The variable, rm, is the return of the market. The variable, ei, is the
error term.
In our empirical research, we neglect the risk-free rate of treasury-bills in the Netherlands and
in Italy so that we may conduct an experiment void of variables that can misconstrue our
analysis of securities in our two portfolios. By regressing firm-specific returns on their market
returns, we find the expected return of a stock. Any discrepancy between a stocks actual return
and its expected return is an abnormal return. An abnormal return in this scenario is an
15 | P a g e

indication of weak-form market inefficiency. By adding all abnormal returns for all components
of both portfolios, we obtain each companys cumulative abnormal return. We take the
cumulative abnormal returns of each company and add them together with the cumulative
abnormal returns of all other companies in the same portfolio. The two portfolios are either
Portfolio NL which represents the Dutch stock market, or Portfolio IT which represents the
Italian stock market. If we find that one portfolio has a higher percentage of companies with
abnormal returns that lie outside of its respective portfolio standard deviation of cumulative
abnormal returns, we can determine that this portfolio is relatively less efficient, and thus this
stock market is relatively less efficient. We do not comment on the objective efficiency of both
stock markets, we only display the relative observed efficiency of both stock markets from the
perspective of an investor.
Our first step is to calculate the abnormal return for every company on all days in our dataset.
Since the actual return is already recorded in our data, we only need to calculate the expected
return. The expected return is obtained from first running a regression of a company on its
market and to use the specific output of the regression to create a market trend line. This market
trend line represents the normal returns. If a market is fully efficient, all company returns should
lie exactly on this line. However, we expect that the returns of the companies vary around the
trend line. Using the specific values for alpha and beta from the regression, we can calculate
the expected return and subtract this from the actual return.
With the values of cumulative abnormal returns and standard deviations of all our companies
and portfolios, we are able to determine which companies are outliers. We consider a company
an outlier when the absolute value of its cumulative abnormal return is larger than the absolute
value of the standard deviation of the index.
Using the processed data on which companies are relative outliers within their respective
portfolios, we are able to create normal distributions of the cumulative abnormal returns. Using
a normal distribution for both portfolios allows for the calculation of the probability of a specific
value of cumulative abnormal returns with respect to the mean of the portfolio. It also makes
the identification of companies that lie outside of standard deviation easier to identify and
visualize.

4.2 Testing
Our empirical testing begins by running a regression of all available historical stock returns of
a given company on the historical returns of its respective market index. We utilize the null
16 | P a g e

hypothesis that the percentage of companies that lies outside of standard deviation of
cumulative abnormal returns is the same for both portfolios. Using the variable XNL to represent
the number of outliers in the portfolio PNL, Portfolio NL, and the variable XIT to represent the
number of outliers in portfolio PIT, Portfolio IT, we come to the following null and alternative
hypotheses:
0 :

1 :

We run a regression of an individual company on its market index to see if the company moves
in the same direction and with the same magnitude that the market does. The calculated alpha
and beta values which comprise the resulting trend line from this regression represent the
normal stock return for that company. Any observations that do not lie on this trend line are
said to be abnormal stock returns. Table 4 shows an example of a regression of the historical
stock returns of the first company in Portfolio NL, Aegon, regressed against the historical
returns of its respective market index, the AEX.
Table 4: Regression of historical returns of Aegon vis--vis historical returns of AEX

From the above regression we can determine that there is a resulting alpha-value of 0.0016269
and a resulting beta-value of 1.614483. The relation between the dependent and independent
values is statistically significant on a 5% level of confidence. The alpha-value is insignificant
on a 5% level of confidence because it would indicate that if the market has a return of zero,

17 | P a g e

then the given company would have a 95% chance of a return of alpha. Equation 4 displays the
resulting trend line from these calculations with a positive y-intercept and a positive slope.
= 0.0016269 + 1.614483

(4)

To further illustrate the relation between a companys stock returns and its indexs returns as
well the concept of abnormal returns, a diagram is a useful resource. Figure 1 shows a graphical
representation of a regression of the returns of Aegon on the returns of AEX, the resulting trend
line which represents normal returns, and all observations of the regression.
Figure 1: Graphical representation of regression of historical returns of Aegon vis--vis
historical returns of AEX
4

Percentage of Returns on Aegon

3,5

-0,15

3
2,5
2
1,5
1
0,5
0
-0,1

-0,05

-0,5

0,05

0,1

0,15

-1
Percentage of Returns on AEX

The above diagram shows that a majority of returns of Aegon are expected returns and thus lie
on their trend line, but this is not the case for all 3650 observations in this example. The
variation around the trend line indicates a different value of returns, hence not all returns of
Aegon are expected (i.e. normal). This finding leads us to believe that the AEX is not perfectly
efficient in the weak-form, but we are less concerned on whether the AEX is efficient or not,
and more concerned with how relatively efficient it actually is.
Moving forward, we calculate the functions of all expected returns for all companies in
Portfolio NL and Portfolio IT and find the resulting trend lines which represent their normal
returns, as shown above. Abnormal returns, AR, can be expressed by Equation 5:
AR = Y

(5)
18 | P a g e

To rewrite this into our equation for the trend line, as given in Equation 4, we utilize the
following general equation:
AR = Y ( + irm)

(6)

In Equation 6, Y is the actual return. The variable, , is the constant. The variable i is the
coefficient of the market index and rm is the market return.
We calculate the abnormal returns for all companies and all dates that are available according
to the above illustrated equation. Adding up all observed abnormal returns, we are able to
calculate the cumulative abnormal return for each company. We gather the value of the
cumulative abnormal returns for each of the 65 companies in both portfolios and organize them
for each from smallest to largest. Table 5 and 6 give the values of the cumulative abnormal
returns for Portfolio NL and Portfolio IT.
Table 5: Cumulative abnormal returns for Portfolio NL ranked from smallest to largest
Number
22
1
13
16
3
14
9
7
5
6
17
20
18
23
12
25
11
21
2
10
8
15
19
24
4

Company
Unibail-Rodamco
Aegon
ING Group
Philips
Akzo Nobel
KPN
DSM
Corio
ASML
Boskalis
Randstad Holding
SBM Offshore
Reed Elsevier
Unilever
Heineken
Ziggo
Gemalto
TNT Express
Ahold
Fugro
Delta Lloyd
OCI
Royal Dutch Shell
Wolters Kluwer
ArcelorMittal

Ticker Symbol
UL.AS
AGN.AS
INGA.AS
PHIA.AS
AKZ.AS
KPN.AS
DSM.AS
CORA.AS
ASML.AS
BOKA.AS
RAND.AS
SBMO.AS
REN.AS
UNA.AS
HEIA.AS
ZIGGO.AS
GTO.AS
TNTE.AS
AH.AS
FUO.AS
DL.AS
OCI.AS
RDSA.AS
WKL.AS
MT.AS

Cumulative Abnormal Returns

-0.619626459
-0.326610086
-0.233641469
-0.191947186
-0.155246825
-0.119942357
-0.101748321
-0.086414801
-0.083317924
-0.074858901
-0.066573181
-0.058928503
-0.057899584
-0.053681427
-0.045904078
-0.025720303
-0.014018884
-0.013410443
-0.009533463
-0.004885449
-0.004522176
-0.000838758
0.004201578
0.01808204
0.060306549

19 | P a g e

Table 6: Cumulative abnormal returns for Portfolio IT ranked from smallest to largest
Number
32
10
33
6
15
8
40
27
31
34
12
35
5
19
29
21
24
28
36
30
14
22
7
3
13
1
11
17
25
9
39
16
26
38
4
2
20
23
18
37

Company
Telecom Italia
Campari
Tenaris
Banca Pop Emilia Romagna
Exor
Banco Popolare
Yoox
Prysmian
Stmicroelectronics
Terna - Rete Elettrica Nazionale
Enel
Tod'S
Banca Monte Paschi Siena
Gtech
Salvatore Ferragamo
Luxottica
Mediolanum
Saipem
Ubi Banca
Snam
Eni
Mediaset
Banca Pop Milano
Autogrill
Enel Green Power
A2a
Cnh Industrial
Finmeccanica
Moncler
Buzzi Unicem
World Duty Free
Fiat
Pirelli & C
Unipolasi
Azimut Holding
Atlantia
Intesa Sanpaolo
Mediobanca
Generali
Unicredit

Ticket Symbol
TIT.MI
CPR.MI
TEN.MI
BPE.MI
EXO.MI
BP.MI
YOOX.MI
PRY.MI
STM.MI
TRN.MI
ENEL.MI
TOD.MI
BMPS.MI
GTK.MI
SFER.MI
LUX.MI
MED.MI
SPM.MI
UBI.MI
SRG.MI
ENI.MI
MS.MI
PMI.MI
AGL.MI
EGPW.MI
A2A.MI
CNHI.MI
FNC.MI
MONC.MI
BZU.MI
WDF.MI
F.MI
PC.MI
US.MI
AZM.MI
ATL.MI
ISP.MI
MB.MI
G.MI
UCG.MI

Cumulative Abnormal Returns

-3.288621675
-0.109351153
-0.059108408
-0.057358903
-0.051727993
-0.050712416
-0.039413352
-0.037165888
-0.035683072
-0.03224069
-0.030502114
-0.029100857
-0.028085922
-0.027381132
-0.02722681
-0.027009608
-0.025756345
-0.025628062
-0.017389757
-0.015311527
-0.014896617
-0.007761084
-0.007697444
-0.004849807
0.006429264
0.014079185
0.014219847
0.016331898
0.017835498
0.018630308
0.02609141
0.0527779
0.057762385
0.099808406
0.19558042
0.565031305
0.984056857
1.08364014
1.433350766
3.982539888

20 | P a g e

Next we find the standard deviation of these cumulative abnormal returns for each portfolio.
We use the standard deviation as a determinant for outliers. If a companys cumulative
abnormal return lies within the standard deviation of the portfolio it is in line with our model,
whereas a company that lies outside the portfolio standard deviation is relatively inefficient
with respect to its portfolio. Table 7 shows the mean and standard deviation of the cumulative
abnormal returns of Portfolio NL and Portfolio IT.
Table 7: Mean and standard deviation of Portfolio NL and Portfolio IT
Portfolio NL

Portfolio IT

Mean

-0.090667216

0.112954621

Standard Deviation

0.139460922

0.888304929

We now compare each cumulative abnormal return with its respective portfolio standard
deviation and determine which companies lie outside the range and are considered as an outlier.
4.3 Results
Following the empirical testing as explained in section 4.2, we can now determine which
companies show noticeable abnormal returns and which portfolio shows inefficiency to a larger
extent.
4.3.1 Results Of Portfolio NL
Comparing the cumulative abnormal return of the 25 Dutch companies with its respective index
standard deviation shows us that 5 companies lie outside the range of the standard deviation
and are thus considered as inefficient. These companies are: Unibail Rodamco, Aegon, INGGroup, Philips and Akzo Nobel. Expressing this in percentage terms and referring to our null
hypothesis, we find:
5
25

100% = 20.00%

Hence, 20.00% of the portfolio shows noticeable abnormal return. With a standard deviation of
0.139, there are four negative outliers and one positive outlier. Figure 2 represents the normal
distribution of Portfolio NL and shows where on the normal distribution all companies lie,
based on their cumulative abnormal return. The x-axis represents the value of the cumulative
abnormal return and the index standard deviation.

21 | P a g e

Figure 2: Normal Distribution of Portfolio NL

4.3.2 Results Of Portfolio IT

Comparing the cumulative abnormal return of the 40 Italian companies with its respective
portfolio standard deviation shows us that 5 companies lie outside the range of the standard
deviation and are thus considered as inefficient. However, expressing this in percentage terms,
gives us a lower number since Portfolio IT is larger.
5
100% = 12.50%
40
Hence, Portfolio IT shows noticeable abnormal return of only 12.50%. The following
companies are considered noticeably inefficient: Telecom Italia, Intesa SanPaolo, MedioBanca,
Generali and UniCredit. Figure 3 represents the normal distribution of Portfolio IT and shows
where on the normal distribution all companies lie, based on their cumulative abnormal return.
Again, the x-axis represents the value of the cumulative abnormal return and the index standard
deviation.

22 | P a g e

Figure 3: Normal Distribution of Portfolio IT

4.3.3 Comparative Results Of Portfolio NL and Portfolio IT

From our empirical testing, we are able to determine that Portfolio IT is relatively more efficient
than Portfolio NL, and thus we can make the conclusion that the Italian stock market is
relatively more efficient than the Dutch market. This conclusion leads us reject our null
hypothesis and to believe that one stock market is able to be relatively more efficient than
another. As mentioned in sub-section 4.1, we do not have the capability to comment on the
objective efficiency of the Dutch and Italian stock markets. The experiment that we conduct is
a measure of perceived market efficiency from the perspective of investors. Also our proxies
of the of the Dutch and Italian stock markets, the AEX and the FTSE MIB respectively, are
incomplete samples of the actual Dutch and Italian stock markets themselves. Keeping these
limitations in mind, we still find evidence of a discrepancy of comparative market efficiency.

23 | P a g e

5.0 Interpretation Of Results

This chapter interprets our results which are represented in the previous chapter. We find that
the Italian stock market is relatively more efficient than the Dutch stock market and thus one
capital market can be relatively more efficient than another. There are a number of interesting
factors what could be responsible for this difference. Section 5.1 starts with differences and
similarities in the indices of both stock markets. Section 5.2 continues with the composition of
each portfolio based on the industry, where section 5.3 pays attention to information disclosure
and transparency. The final two sections touch upon cross-listings and cultural differences
respectively.
5.1 Mechanism Of AEX and FTSE MIB
Where section 2.4 explains the history of the two stock markets and 2.5 explains the mechanism
of both indices, this section elaborates on these differences and similarities in order to place our
outcome of efficiency. The differences in the histories of the Dutch and the Italian stock markets
can be seen as cause for their differences in relative efficiency. As both markets evolved
simultaneously, they both were subject to different economic events. A stock market does not
exist in a vacuum, and is affected by external occurrences that can have a significant impact on
its development. With regards to the AEX and the FTSE MIB, the indices that measure these
two dynamic markets in 2014, both are capped at 15%. This means that in both our samples, no
single company accounts for more than 15% of the index. When it comes to rules for selection,
when a company can be eligible for entering the index, some differences occur. An overview
is given and an explanation follows.

24 | P a g e

Table 8: Rules for selection

Selection Criteria: FTSE MIB

AEX

Free float

At least 15%

At least 15%

Free float velocity

Ranking based on
Free float Market
capitalization
If foreign company
wants to enter the
index

36 or higher, replacing former

constituent with the lowest
ranking
Comply with BIt requirements in
terms of dissemination of
information

At least 25%
15 or higher, replacing former constituent with
the lowest ranking

Have Euronext Amsterdam as Market of

Reference, or comply with percentages of
activities/assets/staff that should located in the
Netherlands
When can a company At quaterly reviews, but Inclusion of comapnies takes places at reviews
enter?
exceptions can be made if there's only (quaterly)
a vacancy outside quaterly
review

Source: NYSE Euronext (2014) and London Stock Exchange Group (2014)

The most interesting difference is when it comes to a foreign company entering the index. In
the Netherlands a foreign company should have the Euronext Amsterdam as a Market of
Reference or, if this is not the case, comply with rules about having a certain percentage of its
assets or activities in the Netherlands, or having a certain percentage of Dutch staff. Italy finds
it more important that a foreign company complies with the Borsa Italiana requirements in terms
of dissemination of information (Borsa Italiana, 2014). Here it comes in place that Italy has
visibly stricter rules applying to disclosing information. This finding is in support of our results,
since stricter rules about information disclosures implies a greater efficiency.
Other features of the index mechanisms are quite the same, concerning exclusion criteria and
general composition rules. Also when it comes to announcement policy both indices take the
same amount of time into account and the announcement is by both done by a technical note.
5.2 Composition Of Portfolio By Industry
The components of the FTSE MIB and the AEX can be divided into 19 separate industries. The
majority of the components of the FTSE MIB are in the banking industry, while the majority
of the components of the AEX are in the financial services industry. Table 9 shows the
industries in which the components of Portfolio NL and Portfolio IT are divided, indicated by
the number of companies present in the industry.

25 | P a g e

Table 9: Industry division of Portfolio NL and Portfolio IT

Industry

Portfolio NL

Portfolio IT

Apparel

Automotive

Banking

Beverages

Broadcasting

Catering

Chemicals

Construction

Consumer Goods

Energy

Engineering

Financial Services

Human Resources

Postal Services

Publishing

Steel & Iron

Technology

Telecommunications 2

Utilities

Total

25

40

Unlike the financial services industry, banking is required to maintain a certain standard of
transparency. The Basel Committee on Banking Supervision states, in accordance with Basel
II, Under Pillar 3, capital adequacy must be reported through public disclosures that are
designed to provide transparent information on capital structure, risk exposure, and risk
management and internal control processes (JPMorgan Chase & Co., 2014). This transparency
requirement implies greater efficiency on the Italian stock market. The reason why banks are
26 | P a g e

mainly absent in Portfolio NL goes back to the creation of the Amsterdam Stock Exchange and
the years there after. According to the comments of Peter Hgfeldt given in the paper of de Jong
& Rell (2005, p. 508), banks played a limited role in the Dutch financial industry and were
therefore not heavily included in the Amsterdam Stock Exchange. For an outside observer
perhaps the most surprising feature of the Dutch nancial system is the limited role played by
the banks in the nancing of industrial growth throughout the industrialization as well as later.
Banks were specialized in traditional short-term financing and not strongly focused on
operating as a universal bank. Bank noninterventionism became a long tradition from the
beginning on.
Another remarkable observation is what type of industry the outliers represent. Where in
Portfolio NL the outliers are in more diversed industries, Portfolio IT has outliers mainly in the
banking industry. The outliers of Portfolio NL are present in the financial services, banking,
technology and chemicals, whereas the outliers of Portfolio IT are present in
telecommunication, banking and financial services. The fact that the outliers of Portfolio IT are
mainly banks, and hence in Portfolio NL the only bank is an outlier as well, can perhaps be
explained by the global financial crisis in 2008. This lies in the time span of our data and may
have an effect on our outliers, but we cannot make any conclusions about its significance at this
time.
5.3 Information Disclosure and Transparency
Transparency of information and disclosing all available information as a company are concepts
that differ among companies and countries. Since the nature of the Efficient Market Hypothesis
is concerned with stock prices reflecting all available information, it is worthy to investigate to
what extent the Netherlands and Italy disclose information. Figure 4 shows information
disclosure in both countries ranging from 2005 until 2013. The extent of disclosing information,
given by the y-axis, ranges from 1 to 10, with 1 being a low degree of disclosing information
and 10 a very high degree. As can be seen from the figure, Italy has a value of 7, where the
Netherlands has a value of only 3, increasing to 4 in the last two years.

27 | P a g e

Figure 4: Degree of information disclosure in the Netherlands and Italy

Business Extent of Disclosure
Index

7
6
5
4

Italy

Netherlands

2
1
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Source: World Data Bank (2014)

This means that Italy discloses more business information than the Netherlands. According to
our assumptions, an efficient market should disclose more information than a less efficient
market. The reason why information disclosure is quite low in the Netherlands is because of a
higher degree of business secrecy. As Peter Hgfeldt in the paper of de Jong & Rell (2005)
states, the Dutch companies have a tradition of secrecy to protect Dutch firms. This goes back
to the beginning of the creation of the Amsterdam Stock Exchange.
5.4 Cross-Listings and Time Zones
The components of Portfolio IT are present on more stock exchanges and in more time zones
than the components of Portfolio NL. The companies that comprise the Italian stock market are
listed on a greater number of different stock markets throughout the world. Considering this
greater variety of stock markets, the FTSE MIB should be more transparent because there is a
greater exposure to investors than the AEX. The components of the FTSE MIB are listed on 60
separate exchanges while the components of the AEX are listed on only 46 separate exchanges.
The companies that comprise the Italian stock market are listed on stock exchanges that reside
in a great number of separate time zones around the world. The fact the FTSE MIB is present
in more time zones than the AEX implies that the prices of its components have to adjust at a
faster and more consistent rate. Table 10 shows the time zones in which the components of
Portfolio NL and Portfolio IT are listed.

28 | P a g e

Table 10: Time zones in which Portfolio NL and Portfolio IT are present in, indicated with the
number of companies
Time Zone

Portfolio NL Portfolio IT

GMT -07:00
GMT -06:00

GMT -05:00 7

GMT -04:00
GMT -03:00

GMT -02:00
GMT -01:00
GMT 00:00

GMT +01:00 36

53

GMT +02:00
Total Listings 46

60

5.5 Cultural Differences

According to Gerard Hendrick Hofstede (1980), the cultural values and traits of the Netherlands
and Italy can be quantified and thus compared with one another. These cultural traits have
implications on the manners in which both nations conduct themselves economically. One
relevant measure of economic culture that is calculated by Hofstede is the Uncertainty
Avoidance Index. Hofstede explains how uncertainty avoidance is related to traditionalism and
a lack of desire to be progressive by stating, Coping with the inevitable uncertainties in life is
partly a non-rational process (Hofstede, 1980, p. 161).
Using this index to compare the Netherlands and Italy, with a score of 100 implying maximum
uncertainty avoidance and a score of 0 implying minimum uncertainty avoidance, the
Netherlands is at 53 while Italy is at 75. We can thus determine that the Italian culture facilitates
a greater degree of uncertainty avoidance in its economics. Uncertainty avoidance in Italy can
be seen its lack of innovation in the banking industry, and its stronger hold on traditional
banking services. Figure 5 shows the percentage of individuals in the Netherlands, the European
Union, and Italy who use internet banking.

29 | P a g e

Figure 5: Percentage of individuals in the Netherlands, European Union, and Italy who use
internet banking from 2005 through 2013

Percentage of Internet
Banking Users

100%
80%
60%
European Union (27 countries)

40%

Netherlands

20%

Italy

0%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Source: Eurostat (2014)

As is shown in the figure above, the Netherlands is consistently more invested in innovative
banking services than is Italy. This is partially the result of uncertainty avoidance present in
Italian culture, which also implies a relatively stronger focus on transparency in its banking
industry. The transparency in the banking industry, which is a result of Italian cultural values,
may contribute to the greater relative efficiency of the Italian stock market.

30 | P a g e

6.0 Conclusion and Recommendation

The Efficient Market Hypothesis has been developed for decades and has been well established
as a valid school of thought within finance. There is a vast amount of empirical research on the
hypothesis, but there are still noticeable contradictions and argument among economists. We
take into account the strengths of both sides of the debate, but based on our results we come to
the conclusion that one stock market can be relatively more efficient than another.

When measuring cumulative abnormal returns, it becomes clear that our Portfolio NL shows a
greater percentage of companies that lay outside of its standard deviation than does our Portfolio
IT. This empirical result leads us to believe that the FTSE MIB is relatively more efficient than
the AEX, and thus the Italian stock market is relatively more efficient than the Dutch stock
market in the weak form. We interpret these findings to be the product of several factors. The
Italian stock exchange is composed of more companies in the banking industry which are
subject to stricter regulations on information disclosure. The components of the Italian stock
exchange are cross listed on more stock exchanges and in more time zones. Finally, the Italian
stock market and the FTSE MIB require a greater degree of information disclosure for the entry
of foreign companies.

There are factors that exist outside the scope of our research, but that we still believe may have
an effect on comparative market efficiency and are thus recommended for further research. In
this thesis we are not able to conduct a comparison of the semi-strong and strong forms of
market efficiency. If the same assessment of comparative market efficiency can be applied to
these two forms, there would be the possibility to obtain more telling results in addition to our
own findings.We also believe that the role of behavioral psychology of investors in capital
markets plays a role in the explanation of comparative market efficiency. The Efficient Market
Hypothesis makes the assumption that all investors are rational, but behavioral finance
contrarily indicates that humans are indeed systematically irrational. If the humans that
comprise stock markets across nations are proven to be irrational, this could lead to a
discrepancy in the observed efficiency of different stock markets. A comparative cultural study
could potentially compliment this finding as well if there is a way to indicate that one nation
has tendencies to be more or less rational than another.

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