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Testing the financial market informational efficiency in emerging states

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  • Camelia Oprean

    () (Lucian Blaga University of Sibiu, Romania)

Abstract

The Efficient Markets Hypothesis (EMH) has been one of the most influential ideas in the past years and highlights that assets prices incorporate all information rationally and instantaneously. The last financial crisis has led to criticism of this hypothesis. Many practical observations concerning the reaction of investors, but also the mechanisms for the information encompassing in the price of stocks, come to highlight the aspects of 'market inefficiency'. Despite its simplicity, the EMH is surprisingly difficult to test and considerable care has to be exercised in empirical tests. It has attracted a considerable number of studies in empirical finance, particularly in determining the market efficiency of an emerging financial market. Empirical tests have given mixed results about efficiency in these markets. The major challenges to EMH are mainly in the following forms: empirical tests for EMH show no evidence in favour of EMH, the existence of the limitations of the statistical and mathematical models for EMH, the evidence of the excess volatility mean reversion predictability, the existence of bubbles, and non-linear complex dynamics and chaos in the stock market. Efficiency tests in emergent markets are rarely definitive in reaching a conclusion about the issue, because, for a test to be reliable, it should take into consideration the institutional features of these markets. To test the hypothesis of informational efficiency of an emergent market, one should take into account some peculiarities of these markets, like: nonlinearity of asset prices, thin trading, the financial liberalization impact on the performance of emerging markets. The paper proposes a critical analysis regarding the testing methods of the informational efficiency theory of the capital market and also proposes new perspectives that are meant to relax the strong EMH assumptions in emerging markets.

Suggested Citation

  • Camelia Oprean, 2012. "Testing the financial market informational efficiency in emerging states," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 4(2), pages 181-190, Decembre.
  • Handle: RePEc:rse:wpaper:v:4:y:2012:i:2:p:181-190
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    File URL: http://reaser.eu/RePec/rse/wpaper/23_Oprean_Reaser4_p181-190.pdf
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    References listed on IDEAS

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    1. Dima, Bogdan & Barna, Flavia & Pirtea, Marilen, 2007. "Romanian Capital Market And The Informational Efficiency," MPRA Paper 5807, University Library of Munich, Germany.
    2. Omay, Nazli C. & Karadagli, Ece C., 2010. "Testing Weak Form Market Efficiency for Emerging Economies: A Nonlinear Approach," MPRA Paper 27312, University Library of Munich, Germany.
    3. Timmermann, Allan & Granger, Clive W. J., 2004. "Efficient market hypothesis and forecasting," International Journal of Forecasting, Elsevier, vol. 20(1), pages 15-27.
    4. Abraham Abraham, 2002. "Testing the Random Walk Behavior and Efficiency of the Gulf Stock Markets," The Financial Review, Eastern Finance Association, vol. 37(3), pages 469-480, August.
    5. Basu, Parantap & R. Morey, Matthew, 2005. "Trade Opening and the Behavior of Emerging Stock Market Prices," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 68-92.
    6. Otilia SARAMAT & Bogdan DIMA, 2011. "Testing the Weak-Form Informational Efficiency of United Kingdom, United States of America and Japan’s Capital Markets," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 4(2(14)), pages 111-122.
    7. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
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    Cited by:

    1. Batiston Marques, Thales & Seixas dos Santos, Nelson, 2016. "Do Political News Affect Financial Market Returns? Evidences from Brazil," MPRA Paper 75530, University Library of Munich, Germany.
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.

    More about this item

    Keywords

    EMH; information; tests; emerging markets;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G00 - Financial Economics - - General - - - General

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