Abstract
Understanding the efficiency of emerging stock markets have become important over the last decades as they are now reasonably integrated with developed and world markets. If emerging markets are efficient, both foreign and domestic investors could, when making their investment decisions, consider an asset price to reflect its true fundamental value at all times.
The empirical studies on emerging market efficiency are however very challenging. First, the heterogeneity of these markets in terms of market size and development levels often leads to country-specific results. Second, only a few studies focus on tests of efficient market hypothesis in emerging markets because the majority of them appear to be less efficient than the semi-strong and the strong forms due to numerous market imperfections such as transaction costs, poor quality of information disclosures, thin trading, and inadequate financial and accounting regulations. Finally, their degree of efficiency may evolve though time, which typically reflects different stages of development and gradual process of liberalization.
The purpose of this chapter is to provide a comprehensive review of the efficient market theory and to explore how the market processes information in emerging countries. Specifically, we present a dynamic parameter model that is suitable for characterizing the possibly time-varying pattern of weak form efficiency in emerging stock markets under the gradual effects of market reforms.
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- 1.
See Dimson and Mussavian (1988) for a brief history of market efficiency. The authors also discuss the contributions and inter-linkages between the most influential research articles of the field.
- 2.
From now on the chapter deals with the informational efficiency of stock markets, but the general knowledge is also valid for other segments of financial markets.
- 3.
- 4.
Some would use the term for which the local government is able to borrow from both foreign and national residents at a fixed interest rate – and thus the horizon for which investors are willing to commit – as a measure for the time span for which timely and reliable information is available. Then, the longer is the maturity date for a local-currency-denominated government bond, the better is the information reliability and the business environment should be closer to being efficient. Others prefer to focus on the company-specific information to determine the amount of general information released to the market. The used method consists of dividing the total return variance of a company’s listed stock into its market and company-specific variance components. A relatively high proportion of reliable company-specific information compared to the market component of the total risk would lead the market to be more efficient since it indicates that company-specific information is available and relevant in asset pricing.
- 5.
Stock prices can be also modeled by a random walk with drift or time trend.
- 6.
Using Monte Carlo experiments, Zalewska-Mitura and Hall (1999) emphasize that this model is able to detect efficiently shifts in market efficiency with the exception of the first few observations.
- 7.
Errunza (2001) documents an amelioration of some market indicators such as the number of listed companies, trading value, turnover ratio, and market capitalization to GDP ratio posterior to market liberalization. Bekaert and Harvey (1995) considered the trade to GDP ratio as proxy of market openings when testing the time-varying market integration in emerging market countries.
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Arouri, M.E.H., Jawadi, F., Nguyen, D.K. (2010). Evolving Stock Market Efficiency. In: The Dynamics of Emerging Stock Markets. Contributions to Management Science. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2389-9_5
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