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Applied Economics Letters, 2006, 13, 463–470

Efficiency of the Philippine
stock market
Rodolfo Q. Aquino
College of Business Administration, University of the Philippines, Diliman,
Quezon City, Philippines
E-mail: rodolfo.aquino@up.edu.ph

The study examines the efficiency of the Philippine stock market using
stock price movements during the period July 1987 to May 2004.
Characterizing stock price movements as an AR(1) process with Laplace
residuals, the statistical evidence supports the hypothesis that the
Philippine stock market is weak-form efficient. An examination of major
events that could plausibly affect share prices and large price movements
from an event study perspective indicates fairly rapid absorption by the
market of information, except in cases of extreme stress caused by political
and economic shocks. Furthermore, factors other than information about
fundamentals appear able to cause major share price movements. Given
these, the support for the semistrong-form efficiency of the stock market is
mixed.

I. Introduction
This study examines the efficiency of the Philippine
stock market. The first part looks at the statistical
properties of stock price changes to determine
whether the stock market is weak-form efficient in
the sense of Fama (1970). The second part examines
semistrong-form efficiency, motivated by the study of
Cutler et al. (1989), using public information relating
to major events that could plausibly affect stock
prices. Cutler et al. chose the 50 largest daily changes
in the Standard & Poor 500 stock index and looked
for explanations in the following day’s New York
Times. They noted that ample evidence existed that
showed that share prices do react to news about
corporate and macroeconomic developments that
could plausibly affect fundamentals. This, as well as
the speed at which the information is incorporated in
prices, is examined in this study using event study
techniques. Event study techniques have been used to
evaluate the impact of political, economic and other

news on financial prices (Chandiok, 1996; Berman
et al., 2000; Kiymaz, 2002; Veraros et al., 2004). In
addition, the stronger assertion that only information
affects asset values as implied by the market efficiency
assumption is examined.
In the following sections, the statistical properties
of movements in the Philippine Stock Exchange
composite index or Phisix1 from 14 July 1987 to 25
May 2004 are studied (4314 trading days).
Then, sample major political, economic and even
natural events that are likely to affect the stock
market are examined relative to the movements in the
Phisix ten days around the event date. Next, the
top 50 relative changes in the Phisix are tabulated
against the explanations offered in the business
newspapers, specifically the Business World (from 22
July 1987 to 25 May 2004), Business Star (14 July
1987 to October 1994) and Business Daily (November
1994 to December 1998). The properties of these
extreme movements are also examined. The final
section concludes.

1

The Phisix is a market-value-weighted index of 30 representative companies from different sectors of the local bourse. Data
is from the Philippine Stock Exchange.
Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online ß 2006 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/13504850500397437

463

The Laplace density is more peaked and has fatter tails than the normal distribution4.16 0.03 −0. Harris and Kucukozmen. 1).08 −0.14 0 Residuals Fig. respectively.2 Although R2 is quite low at 0.06 0.15 0.13 −0. The result is not statistically different from the OLS estimate.i. It has been shown empirically in many established and emerging stock markets that price changes are not normally distributed (see. 1994. Peiro´. is used. Frequency distribution of AR(1) residuals with fitted normal and Laplace densities II. The parameter estimates for the distributions considered in this study are robust in the presence of outliers and are consistent (Weber et al. Also.07 −0. 4 The Laplace distribution belongs to the family of elliptical distributions important in finance theory.10 −0.18. 3 .09 −0. 1 where the 2 normal curve is superimposed over the empirical frequency distribution of AR(1) residuals. Then Pt ¼ lnPt  lnPt1 represents the continuously compounded daily price changes in the stock market.07 0.13 0.03 0.00 −0.3 The Laplace is characterized by its density function   1 1 jx  j fðxÞ ¼  exp .032 (such that the chances of earning excess profits on the basis of information on past prices alone are so small) the assumption that the Pt’s are identically and independently distributed (i.14 0.10 0.11 −0. Pt seems to be characterized by an AR(1) process with a statistically significant first-order autocorrelation coefficient of 0.01 0. 1<x<1 2  where X represents the residuals and  and  the location and scale parameters of the distribution. the parameters are estimated by employing an optimization routine to minimize the Kolmogorov-Smirnov (KS) goodness of fit statistic. Thus. Table 1 shows the estimation results and the Ordinary least squares (OLS). Visual inspection shows this to be a better fit (Fig. for example.R.02 −0.04 0.02 0. the distributional characteristics of the residuals given an AR(1) process is examined instead.) necessary for fitting a distribution function (df) is not entirely true.04 −0. Aquino 464 1000 900 800 Laplace density 700 Frequency 600 500 Normal density 400 300 200 100 0.. Q. the Laplace (or double exponential) distribution is therefore considered. In both cases.09 0.12 −0.11 0.01 −0. 1. Non-normality is confirmed in Fig. 1996). See Johnson and Kotz (1970) for an extensive reference on this distribution.05 −0.05 0. An alternative. which is the best linear unbiased estimator even in the presence of non-normal errors.12 0. Statistical Analysis of Daily Price Changes Let Pt be the Phisix level at the end of trading day t.08 0. The first-order autocorrelation coefficient is also estimated using the least absolute deviation method which is the maximum likelihood estimator when the errors follow the Laplace df (McDonald.d.06 −0. 2005). 2001).

is nevertheless used in the event studies as an improvement over the normal. In the sense described above.0176* 0. the event day is the following day. Under the assumption that the |X  |’s are i. 1998). the gamma distribution. indicating that these events may have been anticipated and partly discounted by the market.e. For purposes of this study. of observations Critical values: 0.0327 *The goodness of fit hypothesis is not rejected at both 0.0269 0.05 and 0.0207 0.0251* 1.18 2157 0.0116 0. the probabilities corresponding to abnormal price changes during the event day and the days before and after an event can be estimated. P(YN  y)  0.0207 0.0133 0. the variable of interest is the abnormal residual during the event day itself.. The absence of day-of-the-week effect noted by Brooks and Persand (2001).00007 0.01 0. with  ¼ N and  equal to that resulting from the fitted Laplace distribution. corresponding KS statistics which favour the Laplace distribution.0101 0.0 4313 0. 6 For events in the USA.0248 0.8924 0.. The last two columns of the table show the average absolute residuals during the periods before and after the event and the probabilities that values greater than or equal to these averages are observed. random variables has a gamma distribution. using the results that the absolute value of the deviation of the residuals from the Laplace location parameter has an exponential distribution and that the sum of i.00018 n. Philippine time.i. only eight of the major events appear to affect stock prices.00026 2. For N ¼ 1.Efficiency of the Philippine stock market 465 Table 1. Then. Distribution fit statistics for AR(1) residuals Statistics Normal Laplace Gamma (1) Gamma (2) KS statistic Location parameter Scale parameter Variance Variance ratio No.18. Table 1 shows this to be 2.a. Table 1 shows the results indicating good fit..1127 0. 4313 0. Linden (2001) showed that the Laplace distribution can be derived from a conditional normal distribution with stochastic variance. These assumptions are not supported here.00011 1. the statistical evidence appears on the whole to support the hypothesis that the stock market is weak-form efficient.0248 0.i. i.0122 0.0263 0. Table 2 shows 18 sample major political.05 0. Major Events and Stock Price Movements Event studies usually assume that daily stock price changes are normal and independently distributed.01 significance levels. Critical values are from Rohatgi (1976).d. The Laplace distribution can be interpreted to mean that the residual (in excess of the location parameter which is also equal to the estimated population mean) has a 50 : 50 chance of being positive or negative and that its absolute value (|X  |) has an exponential distribution (Ross.05. In four of the significant events (a coup attempt.0207 0. In three of these events (two related to coup attempts against President Aquino and the 1987 Black Monday in Wall Street). Define YN ¼ N X i¼1 jXi  j the sum of the absolute deviation of residuals from the location parameter over N days.00007 0. the fitted parameter  and the ratio of the estimated variance for N ¼ 2 to the variance for N ¼ 1 should be close to 2. is consistent with this result. the residuals represent abnormal (in event study terminology) price changes. there were already significant prior movements in the Phisix. 4313 0. If the variables are indeed i.i. the observed value of YN is significant if there is a small enough probability of observing a greater than or equal value. economic and natural events that occurred during the period under study together with the movements in the Phisix five days leading to the event day6 itself and five days after the event.a. Black Monday. III.00030 n. the departure of President 5 Alternatively.5 Except for the small enough predictive power due to the first-order autocorrelation.d. While this is not the result of a formal test. . at least for the January 1990 to January 1996 period covered by their study.d. Assuming instead that expected price changes are given by the AR(1) model.0105* 1. the gamma distribution with parameters  and  is fitted to the observed YN’s for N ¼ 1 and 2.0248 0.

237 0.032 0.014 0.025 0.024 0.014 n.022 0.015 n.000 0. 11 September 2001 Wednesday.071 0.015 0.000 n.005 0.001 0.034 0.027 0.007 0.009 0.014 0. Aquino Powerful earthquake hits Luzon and Manila Iraq invades Kuwait Friday.243 0. 0.003 0.015 0.009 0.022 0.178 0.001 0.000 0.256 0.897 0.046 0.261 0. 0.069 n.000 0.268 0.087 0.808 0.005 0.244 0.001 0.003 0.000 0.018 0.001 0.098 0.008 0.010 0.019 0.072 0.002 0.003 0.015 0.471 0.160 0. Estrada leaves Presidential palace EDSA III Terrorist attacks in the USA US attacks Iraq Friday.t.002 0.006 0.699 0.016 Mean Abs. 15 June 1991 Sunday.015 0.009 0.030 0.032 0.017 0. 19 October 1987 Event Date Table 2.009 0.t.073 0.017 0.011 2/þ3 0.023 0.05 level. 2 November 1990 Wednesday.008 0.017 0.022 0.006 0. 1 May 2001 Tuesday.003 0.031 0.007 0.029 0.873 0.028 0.024 0.011 0.073 0.003 0.004 0.011 0.007 0.021 3/þ2 0.030 0.024 0.009 0.005 0.000 0.000 0.006 0.004 0.725 0.011 0.041 0.952 0.Coup attempt against Pres. 10 May 1992 Tuesday.16 January 1991 Saturday.031 0.014 0. Q.093 0.006 0. 28 August 1987 Peso devalued from 25.013 0.003 0.017 0.138 0.004 0.063 0.016 0.003 0.005 0.059 0.000 0.010 0.004 0.005 0.t. Resid. Sample events that may affect market 0.t.007 0.024 0.057 0.021 0. 17 July 1990 Friday.043 0.252 P(YN  y) 0.050 0.005 n.019 0. 19 March 2003 n.004 0.009 0.001 0.017 0.048 0.041 0.170 0.005 0.003 0.024 0.014 0. 0. Note: Values in bold are significant at least at the 0.013 0.001 0.006 n.002 0.293 0.078 0.018 0.009 0.017 P(Y1  y) 466 R.142 0.002 0.020 0.t.015 0.001 0.040 0.024 0/þ5 0.006 0.002 0.000 0. 1 December 1989 Monday. 12 October 1999 Monday.362 0. Aquino US stock market Black Monday Coup attempt against Pres.023 0.002 0.005 0. Coup leader Noble surrenders Sunday.002 0.009 0.002 n.047 0.040 0.028 0.00 pesos per US dollar USA starts air war against Iraq Mount Pinatubo eruption Presidential election Peso depreciates by 9%.017 0.t.012 0.007 0.014 0. 2 August 1990 Tuesday.011 0.036 0.917 0.008 0.012 0.035 0.967 0.066 0.000 0.020 0. 0.006 0.005 0.013 0.027 0.004 0. 8 January 2001 Saturday.t.011 0.020 0.045 0. 20 January 2001 Tuesday.986 0.327 0.022 0.000 0. 0. 0.038 0.009 0.196 0.012 0.002 0.060 0.016 0.004 0.034 0.031 0.007 0. Aquino .018 0. 0.014 0.010 0. 0.003 0.642 0.010 0.002 0.t. day before and after event 0.049 0.016 0.002 0.001 0.013 0.027 0.906 0.023 0.006 0.003 0.027 0. 0.002 0.022 0.009 0.024 0.064 0.065 0.024 0.016 0.037 0.004 4/þ1 0. 10 May 1998 Tuesday.001 0.038 0. – no trading.003 0.033 0.003 0.013 0.018 0.174 0.012 0.015 0.022 0. 15 July 1997 Sunday.016 0.002 0.001 0.335 0.023 0.t.021 n.002 0.038 0.048 0.025 1/þ4 Abnormal residuals from AR(1) process: Nth Tr.906 0.602 0.75 to 28.013 0.030 0.017 0.005 0.393 0.953 0.051 0.034 0. 7 October 1990 Thursday.006 0. Asian financial crisis Presidential election BW Resources share price drops 30% EDSA II Pres.328 0.

072 26 27 Thursday.106 5 6 7 8 Thursday.067 0. 17 September 1987 1072 799 885 706 0. dispute on military chief appointment No major news Technical correction. Business newspapers’ explanation Buying exuberance after Pres. 18 June 1998 Tuesday. entry of foreign investors Oil price increase and drops in foreign markets due to Iraq crisis Probable rejection of US bases treaty Unexpected Fed rate cut and resulting euphoria in regional markets Well-publicized nationwide strike fizzled out Coup rumours Reaction to rollback in fuel prices Disclosure that EEI. 50 Largest Phisix changes and explanations (1987–2004) Date Phisix Monday.065 0.076 0. 28 August 1997 2072 0. Estrada left presidential palace Foreign buying triggered by hastened impeachment proceedings for Pres.072 0. 18 September 1987 Residual No. 11 July 1997 Wednesday.077 0. 13 June 1990 Thursday.075 0.151 3 819 0.075 0. anticipated drop in Hong Kong stocks Speculative buying on PLDT due to news of takeover talks Technical rebound Coup and labour strike rumours Warning of possible coup made by Armed Forces Chief of Staff Peso devaluation causes massive buying sprees Orderly elections and emergence of 2 frontrunners acceptable to business sector Bombing.066 0. 24 August 1987 Tuesday.148 4 Friday.064 0. 29 October 1987 Friday.098 9 Monday. jittery investors unloading in near panic Reports that Tara oil well may be dry Currency concerns.065 0.063 0. April 10. Dow Jones drops 7. 30 May 1990 2146 566 1200 738 1518 822 986 1948 1175 1075 1336 812 1269 862 757 803 0. PLDT rise in NYSE Surrender of coup attempt leader in Mindanao No major news. better than expected GNP/GDP data PLDT shares dumped Bombings. 25 September 1990 688 2903 867 569 0. Estrada’s acquittal. 5 February 1991 Wednesday. 22 January 2001 1708 0.081 0. 18 August 1987 Tuesday.142 0. 17 January 2001 999 1235 907 1829 973 860 518 1459 0.068 32 33 Thursday. July 24.070 0. 11 September 1991 Friday.062 0.096 0.062 42 43 44 45 46 47 48 49 Wednesday.091 0.057 50 Friday. 16 October 1998 902 1437 0. stockbrokers brief walkout Steadier peso and rising regional markets . 1987 Tuesday. September 18.068 0.115 0.064 0. 25 October 1990 Wednesday. 1 October 1987 Monday.066 0. overstated income Massive selling in Wall St.093 0. 28 October 1997 Tuesday.069 0. 1991 Monday. 22 August 1990 Wednesday.075 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Friday. Aquino’s government Market correction Dow Jones crashes 508 points (Black Monday) Political rumours/uncertainty Rumour of Gen.065 34 35 36 37 38 39 40 41 Friday.069 28 29 30 31 Wednesday. 23 July 1987 Monday.089 0. congress opening.067 0.Efficiency of the Philippine stock market 467 Table 3. 19 October 1987 Thursday. 8 October 1987 Wednesday.152 2 Tuesday. 27 July 1987 Friday. 30 January 1998 Friday.075 0.088 0. Aquino’s government Economic growth numbers confirm fears of slowdown. 20 October 1987 Monday. world stocks uptick News on possible compromise on US bases Peaceful independence day celebrations Military mutiny in Mindanao Fear of Pres. July 20.078 0.127 0. 20 December 1993 Wednesday. 1987 Monday.062 0.18% Congress proposal to raise transaction tax on stocks Dow Jones jumped 42 points Interest rate cut. 11 December 1989 Thursday. positive reaction to Pres. 4 October 1990 Wednesday. 6 November 2000 1500 0. foreign investors’ panic selling Return of foreign funds to the region. 14 January 1998 1686 0.071 0. 17 September 1998 Wednesday. 6 February 1991 Tuesday.071 0. 7 September 1987 Thursday. 26 August 1987 Monday. a major company. coup and gulf war anxieties PLDT’s record close in NYSE. 8 October 1990 Monday. 1998 Wednesday. Ramos breaking from Pres. stronger peso.063 0. 11 February 1998 615 738 1049 1017 1740 1043 810 2218 0. buoyant foreign markets Foreign markets rise. regional uncertainties Substantial stock dividends in key mining and oil stocks Market correction PLDT rise in NYSE.. 24 September 1991 Wednesday. 15 December 1989 Thursday. 23 August 1990 Monday. 13 May 1992 2701 1340 0.161 1 Monday. 28 July 1987 1146 0.086 0. Estrada Technical rebound. 26 October 1987 Thursday. 9 January 1998 Thursday. 2 February 1998 Monday. 21 October 1987 Thursday.078 0.062 0.084 0. Ramos’ press conference expressing full military support to Pres. Aquino’s speech Chief of Staff Gen. foreign buyers into property shares Rumors of another coup Market correction Record high metal prices Strong yen rally.

. These events are the Mount Pinatubo eruption and two local political events.R. However. 2. Major Stock Price Movements and Explanations Table 3 shows the 50 largest relative changes in the Phisix and the explanations provided by business newspapers the day after.10 0.05 0. If the Gumbel distribution is the limiting df of z. Note that 18 of the top 50 largest movements occurred in the politically-turbulent last 5½ months of 1987. Only eight of the top 50 movements have residuals larger than this value. It is known that the distribution of the largest value realized from an exponential distribution converges to the Gumbel distribution (Mood et al. . with the possible exception of the top five events. they were sceptical of this possibility and argued that news important enough to account for large swings in the demand for stocks should be detectable in economic statistics or in media reports. In an even more significant number of cases (12). This is suggestive of lingering uncertainty and gradual absorption of information by the market in times of extreme political and economic stress. In three significant events. is 10. including the 2001 EDSA7 III riots that threatened the government of President Arroyo. the expected largest value. an.01 level. The top 50 largest residuals from an AR(1) process in Table 3 are all significant at least at the 0. and the 9/11 terrorist attacks in the USA).e. For n ¼ 4313. the assumption that the Y’s are generated by the exponential distribution is given additional support. the plot must be approximately linear. the major effects on the market were only felt during the day immediately after these events. There are also only five events for which PðYnn > yÞ < 0:10: Thus. only 12 of the largest movements occurred during the last 6 months of 1997 and the whole of 1998 in the midst of the Asian financial crisis. When there were two major business newspapers in circulation. .20 X MAX Fig. some have suggested (e. Table 4 groups the explanations into six general categories. . 1958) of maximum values from a partition of the sample into 43 non-overlapping sub-samples of 100 (101 for 13 sub-samples) against the inverse Gumbel df. .22%. In contrast. where ^ is approximated by ^ ln n and . 2 0 −2 0. However. i. In a significant number (8) of the top 50 stock price changes. noted that a hypothesis that stock prices move in response to news that is observable by market participants but not by investigators studying the market is obviously irrefutable. economic or corporate news reported that could have caused the market to move. and a major earthquake in 1990. the estimated scale parameter of the Laplace distribution discussed earlier. Q.. 2 shows the quintile or QQ plot (see Gumbel. Aquino 468 IV.00 0. 1974) with df HðxÞ ¼ expðez Þ where Ynn  an b Given n realizations of Y. Cutler et al. As a further (albeit indirect) support. This highlights the dominance of political events and even rumours over economic news in explaining stock price changes. 2. . oftentimes from interviews with stock brokers and analysts. the 1998 presidential elections won by President Estrada (who was not favoured by the business sector). the effects continued to be felt as indicated by the significant cumulative absolute residuals during the days after the event. Yn g: The norming parameters an ð ¼ E ½Ynn Þ and bn are z¼ 7 4 Inverse DF Estrada from the Presidential Palace. Denote the probability of observing the largest value of the residuals greater than a value y as PðYnn > yÞ. there were no major political.15 0. The events that were seemingly ignored by the market include the 1990 devaluation of the peso. this is less than 0. the explanations given by both newspapers were generally in agreement. rumours or noise seemed to be the major factors that caused prices to change. 1994) that EDSA is the name of the major road where protestors against the government congregated.g. This appears to be the case in Fig.01 only for the largest residual in Table 3. Quantile plot of sample extreme residual values ^ respectively. Ynn ¼ maxfY1 . up to December 1998. Fig. Romer..

Graybill. J. (1958) Statistics of Extremes. Brooks. R. 12. References Berman. Johnson. An examination of major events that could plausibly affect share prices and large price movements from an event study perspective indicates fairly rapid absorption by the market of information.. A. NY. 28. 383–417. Applied Economics Letters. in Handbook of Statistics. Given these. Applied Economics Letters. 781–4. (2002) The stock market rumours and stock prices: A test of price pressure and size effect in an emerging market. and Boes. S. 427–61. M. The statistical evidence appears to support the hypothesis that the Philippine stock market is weak-form efficient. Poterba. G. D. 25. B. (1970) Continuous Univariate Distributions – 2. R. Cutler. pp. D. 469–74. Vol. D.. Harris. Chandiok. M. and Kotz. C.g. New York. (2001) A model for stock distribution. Brooks. New York. factors other than information about fundamentals appear able to cause major share price movements. Mood. Journal of Portfolio Management. F. Similar computations to those in Table 2 are made with respect to the top 50 price movements with large price movements serving as proxies for unobserved events. 247–53. Roll. (1996) Probability distributions for financial models. Boston. Both explanations are plausible in times of great market uncertainty. 5 Days after event Days before and after event Totals Acknowledgements The author is grateful to Roy Yban˜ez and Joel C. (1996) The impact of an unexpected political resignation on exchange rates. A. Linden. 367–71. (2001) The empirical distribution of stock returns: Evidence from an emerging European market.. (1974) Introduction to the Theory of Statistics. L. M. S. C. and Kucukozmen. S. McDonald. (2001) Seasonality in Southeast Asian markets: Some new evidence on day-of-the-week effect. (1970) Efficient markets: A review of theory and empirical work. Summary of top price movements and explanations offered Significant movements Explanations offered Political events Foreign political/ economic news Rumours No major news Domestic economic news Corporate developments Totals Event day only 4 Days before event 3 1 2 4 2 4 1 2 7 11 3 1 1 0 9 1 1 1 0 9 4 2 2 0 14 3 6 2 4 18 12 8 7 5 50 changes could also be due to rational investors revising their views of market fundamentals even without discernable news. 15.. Yu for their valuable comments. Furthermore. F. there were lingering abnormal residuals in the days after the event. H. 3rd edn. R. Applied Economics. McGraw Hill Book Co. Concluding Remarks The study showed that stock price movements in the Philippines are better characterized by an AR(1) process with residuals following the Laplace distribution rather that the normal distribution usually assumed. E. 14 (Eds) C. V. Kiymaz. J. except in times of extreme stress due to political and economic shocks that appear to generate a great deal of market uncertainty. Columbia University Press. 7. Journal of Finance. H. Fama. and Summers. C. Houghton Mifflin Company. MA. J. 6. Elsevier Science. Applied Financial Economics.Efficiency of the Philippine stock market 469 Table 4. Others (e. and Davidson. Maddala and C. 1984) suggest that the trading process itself causes prices to move. NY. 4–12. Amsterdam. . A. C. G. Applied Economics Letters. Rao. Journal of International Finance and Economics. 8. 159–69. 155–8. M. In more than half of the 50 cases (32). (2000) The Sydney Olympic Games announcement and Australian stock market reaction. the support for the semi-strong-form efficiency of the stock market is mixed. C. N. E. and Persand. Gumbel. (1989) What moves stock prices?. L. 8.. This confirms the observation made in the previous section on the gradual absorption of information by the market in times of extreme stress.

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