When the market becomes inefficient: Comparing BRIC markets with markets in the USA
AbstractA rational investor will believe that an efficient market today will remain efficient tomorrow. However, when emotions take over, markets are no longer efficient. Further, they may remain so for longer anyone can forecast. Evidence of such inefficiencies is prominent in large emerging markets in Brazil, Russia, India and China and also in developed markets in the USA. When a market is inefficient and sentiments play a dominant role in an investor's decision making, valuation by any existing asset pricing model would produce a suboptimal risk–return relationship. Standard pricing technology will guide a rational investor to wrong policies for his new investments or for reallocating his old investments. In an alternative approach, we have worked out a model which incorporates market sentiments in the domain of the standard rational model of asset pricing. Our model is applicable for a ‘less than’ efficient market and, therefore, may be a useful input in investors' toolkits.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 24 (2012)
Issue (Month): C ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/620166
Asset pricing model; Efficient market hypothesis; Hurst exponent;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Majumder, Debasish, 2006. "Inefficient markets and credit risk modeling: Why Merton's model failed," Journal of Policy Modeling, Elsevier, vol. 28(3), pages 307-318, April.
- Lee, Wayne Y. & Jiang, Christine X. & Indro, Daniel C., 2002. "Stock market volatility, excess returns, and the role of investor sentiment," Journal of Banking & Finance, Elsevier, vol. 26(12), pages 2277-2299.
- Bird, R. & Menzies, G. & Dixon, P. & Rimmer, M., 2011.
"The economic costs of US stock mispricing,"
Journal of Policy Modeling,
Elsevier, vol. 33(4), pages 552-567, July.
- G. Menzies & R. Bird & P. Dixon & M. Rimmer, 2010. "The Economic Costs of US Stock Mispricing," Centre of Policy Studies/IMPACT Centre Working Papers g-204, Victoria University, Centre of Policy Studies/IMPACT Centre.
- B. Mandelbrot, 1972. "Statistical Methodology For Nonperiodic Cycles: From The Covariance To Rs Analysis," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 1, number 3, pages 259-290 National Bureau of Economic Research, Inc.
- Jaeun Shin, 2005. "Stock Returns and Volatility in Emerging Stock Markets," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 4(1), pages 31-43, April.
- Jay Squalli, 2006. "A non-parametric assessment of weak-form efficiency in the UAE financial markets," Applied Financial Economics, Taylor & Francis Journals, vol. 16(18), pages 1365-1373.
- Mookerjee, Rajen & Yu, Qiao, 1999. "An empirical analysis of the equity markets in China," Review of Financial Economics, Elsevier, vol. 8(1), pages 41-60, June.
- Lo, Andrew W. (Andrew Wen-Chuan), 1989.
"Long-term memory in stock market prices,"
3014-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Debasish Majumder, 2011. " Asset Pricing when Market Sentiments Regulate Asset-Returns: Evidences from Emerging Markets," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(1), pages 89-117.
- Rafal Weron, 2001. "Measuring long-range dependence in electricity prices," Papers cond-mat/0103621, arXiv.org.
- Walter KrÄmer, 1998. "Note Short-term predictability of German stock returns," Empirical Economics, Springer, vol. 23(4), pages 635-639.
- A. Sabur Mollah, 2007. "Testing Weak-Form Market Efficiency In Emerging Market: Evidence From Botswana Stock Exchange," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(06), pages 1077-1094.
- Lim, Kian-Ping & Brooks, Robert D. & Hinich, Melvin J., 2008. "Nonlinear serial dependence and the weak-form efficiency of Asian emerging stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 527-544, December.
- Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998.
"A model of investor sentiment,"
Journal of Financial Economics,
Elsevier, vol. 49(3), pages 307-343, September.
- Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- Chopra, Navin & Lakonishok, Josef & Ritter, Jay R., 1992. "Measuring abnormal performance : Do stocks overreact?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 235-268, April.
- Sánchez Granero, M.A. & Trinidad Segovia, J.E. & García Pérez, J., 2008. "Some comments on Hurst exponent and the long memory processes on capital markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(22), pages 5543-5551.
- Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
- LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
- Jose Garcia Blandon, 2007. "Return autocorrelation anomalies in two European stock markets," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 22(1), pages 59-70, June.
- Doron Avramov & Tarun Chordia & Amit Goyal, 2006. "Liquidity and Autocorrelations in Individual Stock Returns," Journal of Finance, American Finance Association, vol. 61(5), pages 2365-2394, October.
- Chen, Carl R. & Su, Yuli & Huang, Ying, 2008. "Hourly index return autocorrelation and conditional volatility in an EAR-GJR-GARCH model with generalized error distribution," Journal of Empirical Finance, Elsevier, vol. 15(4), pages 789-798, September.
- Manolis Kavussanos & Everton Dockery, 2001. "A multivariate test for stock market efficiency: the case of ASE," Applied Financial Economics, Taylor & Francis Journals, vol. 11(5), pages 573-579.
- Ferson, Wayne E & Korajczyk, Robert A, 1995. "Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 309-49, July.
- Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October.
- Lim, Kian-Ping & Brooks, Robert D. & Kim, Jae H., 2008. "Financial crisis and stock market efficiency: Empirical evidence from Asian countries," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 571-591, June.
- Cajueiro, Daniel O & Tabak, Benjamin M, 2004. "The Hurst exponent over time: testing the assertion that emerging markets are becoming more efficient," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 336(3), pages 521-537.
- LeBaron, Blake, 1992.
"Some Relations between Volatility and Serial Correlations in Stock Market Returns,"
The Journal of Business,
University of Chicago Press, vol. 65(2), pages 199-219, April.
- Chang, Eui Jung & Lima, Eduardo Jose Araujo & Tabak, Benjamin Miranda, 2004. "Testing for predictability in emerging equity markets," Emerging Markets Review, Elsevier, vol. 5(3), pages 295-316, September.
- Majumder, Debasish, 2014. "Asset pricing for inefficient markets: Evidence from China and India," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 282-291.
- Gilenko, Evgenii & Fedorova, Elena, 2014. "Internal and external spillover effects for the BRIC countries: Multivariate GARCH-in-mean approach," Research in International Business and Finance, Elsevier, vol. 31(C), pages 32-45.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.