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Financial Liberalization and Stock Market Efficiency: Causality Analysis of Emerging Markets

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  • Navaz Naghavi
  • Wee-Yeap Lau

Abstract

This paper studies the long- and short-run relationship between financial liberalization and stock market efficiency. It expands the extant body of knowledge by investigating Granger causality relationship applying mean group, common correlated effect mean group and common correlated effect pooled estimator to balanced panel data for 27 emerging markets over the period 1996–2011. We find evidence of financial liberalization Granger causes stock market efficiency, which is consistent with liberalization leads to efficiency hypothesis. Subsequently, our work makes a fresh contribution to the literature by focusing on informational efficiency of stock markets rather than financial development. Furthermore, we find that a negative long-term relationship between financial liberalization and stock return autocorrelation coexists with a positive short-term relationship between the two. The findings that financial liberalization, which has a deteriorated effect on stock market efficiency in the short-run, but positive impact in the long-run, allow us to draw an analogy similar to the J-curve hypothesis.

Suggested Citation

  • Navaz Naghavi & Wee-Yeap Lau, 2016. "Financial Liberalization and Stock Market Efficiency: Causality Analysis of Emerging Markets," Global Economic Review, Taylor & Francis Journals, vol. 45(4), pages 359-379, October.
    • Handle: RePEc:taf:glecrv:v:45:y:2016:i:4:p:359-379
    DOI: 10.1080/1226508X.2016.1198921
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    Cited by:

    1. Tao Xiong & Miao Li, 2024. "A tale of two contracts: Was the SHFE copper futures market disrupted by the listing of INE bonded copper futures?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(2), pages 281-301, February.
    2. Caihong Xu & Dong Zhang, 2019. "Market openness and market quality in gold markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 384-401, March.
    3. Wei Cui & Insook Cho, 2019. "Household’s Happiness and Financial Market Participation," Global Economic Review, Taylor & Francis Journals, vol. 48(4), pages 396-418, October.

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