Trade Openness and the Weak-Form Efficiency of Emerging Stock Markets

35 Pages Posted: 17 Sep 2008

See all articles by Kian-Ping Lim

Kian-Ping Lim

Universiti Malaya

Jae H. Kim

affiliation not provided to SSRN

Date Written: September 17, 2008

Abstract

Basu and Morey [Trade opening and the behavior of emerging stock market prices, Journal of Economic Integration 20(1), 2005, 68-92] develop a theoretical model that predicts financial opening without trade reform does not lead to higher weak-form efficiency. The present paper brings their proposition to the data of 23 emerging stock markets. In general, the key results from fixed effects panel regressions support their prediction that trade liberalization, rather than financial openness, matters the most for informational efficiency. However, our empirical findings are not consistent with their postulated mechanisms through which it occurs. Firstly, it is not the official removal of non-tariff barriers that leads to higher stock price informativeness. What really matters for stock market investors is the actual level of economy integration in the reforming country with the world. Secondly, it is not the actual gain in productive efficiency in the real sector that leads to higher weak-form market efficiency. Instead, stock prices incorporate information about the expected gain from trade openness, such as higher future profitability or greater future productivity growth.

Keywords: Trade Openness, Financial Openness, Stock Market Efficiency

JEL Classification: F15, F36, G14

Suggested Citation

Lim, Kian-Ping and Kim, Jae H., Trade Openness and the Weak-Form Efficiency of Emerging Stock Markets (September 17, 2008). Available at SSRN: https://ssrn.com/abstract=1269312 or http://dx.doi.org/10.2139/ssrn.1269312

Kian-Ping Lim (Contact Author)

Universiti Malaya ( email )

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

Jae H. Kim

affiliation not provided to SSRN

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