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Why Do Emerging Stock Markets Experience More Persistent Price Deviations From A Random Walk Over Time? A Country-Level Analysis

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  • Lim, Kian-Ping
  • Brooks, Robert D.

Abstract

This paper employs the rolling bicorrelation test to measure the degree of nonlinear departures from a random walk for aggregate stock price indices of fifty countries over the sample period 1995–2005. We find that stock markets in economies with low per capita GDP in general experience more frequent price deviations than those in the high-income group. This clustering effect is not due to market liquidity or other structural characteristics, but instead can be explained by cross-country variation in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets dominated by sentiment-prone noise traders whose correlated trading causes stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.

Suggested Citation

  • Lim, Kian-Ping & Brooks, Robert D., 2010. "Why Do Emerging Stock Markets Experience More Persistent Price Deviations From A Random Walk Over Time? A Country-Level Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S1), pages 3-41, May.
    • Handle: RePEc:cup:macdyn:v:14:y:2010:i:s1:p:3-41_09
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    Cited by:

    1. Sattarhoff, Cristina & Gronwald, Marc, 2022. "Measuring informational efficiency of the European carbon market — A quantitative evaluation of higher order dependence," International Review of Financial Analysis, Elsevier, vol. 84(C).
    2. Graham Smith & Aneta Dyakova, 2014. "African Stock Markets: Efficiency and Relative Predictability," South African Journal of Economics, Economic Society of South Africa, vol. 82(2), pages 258-275, June.
    3. Kunal Saha & Vinodh Madhavan & Chandrashekhar G. R. & David McMillan, 2020. "Pitfalls in long memory research," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1733280-173, January.
    4. Hooy, Chee-Wooi & Lim, Kian-Ping, 2013. "Is market integration associated with informational efficiency of stock markets?," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 29-44.
    5. Lazăr, Dorina & Todea, Alexandru & Filip, Diana, 2012. "Martingale difference hypothesis and financial crisis: Empirical evidence from European emerging foreign exchange markets," Economic Systems, Elsevier, vol. 36(3), pages 338-350.
    6. Hiremath, Gourishankar S & Bandi, Kamaiah, 2010. "Some Further Evidence on the Behaviour of Stock Returns in India," MPRA Paper 48518, University Library of Munich, Germany.
    7. Gyamfi NE & Kyei KA & Gill R, 2016. "African Stock Markets and Return Predictability," Journal of Economics and Behavioral Studies, AMH International, vol. 8(5), pages 91-99.
    8. Hiremath, Gourishankar S & Bandi, Kamaiah, 2009. "On the random walk characteristics of stock returns in India," MPRA Paper 46499, University Library of Munich, Germany.
    9. Lim, Kian-Ping & Hooy, Chee-Wooi & Chang, Kwok-Boon & Brooks, Robert, 2016. "Foreign investors and stock price efficiency: Thresholds, underlying channels and investor heterogeneity," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 1-28.
    10. Ben Rejeb, Aymen & Arfaoui, Mongi, 2016. "Conventional and Islamic stock markets: what about financial performance?," MPRA Paper 73495, University Library of Munich, Germany.
    11. Alexandru Todea & Dorina Lazar, 2012. "Global Crisis and Relative Efficiency: Empirical Evidence from Central and Eastern European Stock Markets," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 4(1), pages 045-053, June.
    12. Graham Smith & Aneta Dyakova, 2016. "The Relative Predictability of Stock Markets in the Americas," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(2), pages 131-142, April.
    13. Todea, Alexandru & Pleşoianu, Anita, 2013. "The influence of foreign portfolio investment on informational efficiency: Empirical evidence from Central and Eastern European stock markets," Economic Modelling, Elsevier, vol. 33(C), pages 34-41.
    14. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Liquidity and firm value in an emerging market: Nonlinearity, political connections and corporate ownership," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    15. Ben Rejeb, Aymen & Boughrara, Adel, 2013. "Financial liberalization and stock markets efficiency: New evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 17(C), pages 186-208.
    16. Juan Benjamin Duarte Duarte & Katherine Julieth Sierra Suarez & Juan Manuel Mascarenas Perez-Inigo, 2014. "Evaluation Of Long-Term Memory In Colombian Stock Market By Hurst Coefficient, Evaluacion De La Memoria De Largo Plazo Del Mercado Bursatil Colombiano Mediante El Coeficiente De Hurst," Revista Internacional Administracion & Finanzas, The Institute for Business and Finance Research, vol. 7(4), pages 1-10.
    17. Erasmus Kersting & Christopher Kilby, 2019. "Does the World Bank Move Markets?," Villanova School of Business Department of Economics and Statistics Working Paper Series 42, Villanova School of Business Department of Economics and Statistics.
    18. Asgar Ali & K. N. Badhani, 2021. "Beta-Anomaly: Evidence from the Indian Equity Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(1), pages 55-78, March.

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