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

64 Pages Posted: 3 Aug 2008

See all articles by Kian-Ping Lim

Kian-Ping Lim

Universiti Malaya

Robert D. Brooks

Monash University; Financial Research Network (FIRN)

Date Written: August 1, 2008

Abstract

This study employs the rolling bicorrelation statistic to measure the degree of stock price deviations from a random walk for the stock markets of 50 countries over the period 1995-2005. We find that stock markets in economies with low per capita GDP in general experience more persistent 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 variations in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets being dominated by sentiment-prone noise traders whose correlated trading cause stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.

Keywords: random walk, weak-form market efficiency, degree of market efficiency, determinants of market efficiency, private property rights

JEL Classification: G14, G15, G38, C49, N20

Suggested Citation

Lim, Kian-Ping and Brooks, Robert Darren, Why Do Emerging Stock Markets Experience More Persistent Price Deviations from a Random Walk Over Time? A Country-Level Analysis (August 1, 2008). Available at SSRN: https://ssrn.com/abstract=1194562 or http://dx.doi.org/10.2139/ssrn.1194562

Kian-Ping Lim (Contact Author)

Universiti Malaya ( email )

Department of Economics
Faculty of Economics and Administration
Kuala Lumpur, 50603
Malaysia

Robert Darren Brooks

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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