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WHY DO EMERGING STOCK MARKETS EXPERIENCE MORE PERSISTENT PRICE DEVIATIONS FROM A RANDOM WALK OVER TIME? A COUNTRY-LEVEL ANALYSIS

Published online by Cambridge University Press:  15 December 2009

Kian-Ping Lim  and
Robert D. Brooks
Kian-Ping Lim*
Affiliation:
Labuan School of International Business and Finance, Universiti Malaysia Sabah and Monash University
Robert D. Brooks
Affiliation:
Monash University
*
Address correspondence to: Kian-Ping Lim, Labuan School of International Business and Finance, Universiti Malaysia Sabah, Jalan Sungai Pagar, 87000 F.T. Labuan, Malaysia; e-mail: [email protected].
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Abstract

This paper employs the rolling bicorrelation test to measure the degree of nonlinear departures from a random walk for aggregate stock price indices of fifty countries over the sample period 1995–2005. We find that stock markets in economies with low per capita GDP in general experience more frequent 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 variation in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets dominated by sentiment-prone noise traders whose correlated trading causes stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.

Keywords

Random WalkDegree of Market EfficiencyDeterminants of Market EfficiencyPrivate Property Rights
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Supplement S1: Nonlinear Time Series , May 2010 , pp. 3 - 41
Copyright
Copyright © Cambridge University Press 2009

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