Financial Liberalization and Stock Price Behaviour in Asian Emerging Markets
Journal
Economic Change and Restructuring (formerly Economics of Planning)
ISSN
0013-0451
ISSN-Digital
1573-0808
Type
journal article
Date Issued
2005-03-01
Author(s)
Abstract
This paper exhibits tests of the random walk hypothesis and market efficiency for seven Asian emerging markets as a result of the influence of financial market integration. Random walk properties of equity prices influence the return dynamic and determine the trade strategies of investors. To examine the stochastic properties of local index returns and to test the hypothesis that stock market prices follow a random walk, the single variance ratio tests of Lo and MacKinlay, as well as the multiple variance ratio test of Chow and Denning are employed. The multiple statistical comparison of variance ratios is based on the Studentized Maximum Modulus distribution with control of the joint-test's size. The weak-form market efficiency is also tested directly, using a nonparametric runs test. These tests are particularly useful for investigating stock prices the returns of which are frequently not distributed normally. Documented evidence shows that, from the perspective of local investors, weekly stock prices in major Asian emerging markets do not follow a random walk in the pre-liberalization period. However, in the post-liberalization period the weak-form efficiency hypothesis is generally adopted at the 5% level except for the smaller stock markets of Indonesia and Thailand. These empirical findings suggest that financial integration affects the return predictability in such a way that domestic investors might not be able to develop trading strategies allowing them to earn abnormal returns.
Language
English
Keywords
Asian emerging markets - market efficiency - multiple variance ratio test - random walk - runs test - weak-form market efficiency
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Springer
Publisher place
Dordrecht
Volume
38
Number
1
Start page
37
End page
62
Pages
26
Subject(s)
Eprints ID
216344