Measuring Short-Term International Stock Market Efficiency

Are Emerging Markets inefficient? No, according to the following study.

Measuring Short-Term International Stock Market Efficiency

Griffin, John M., Kelly, Patrick J. and Nardari, Federico, "Measuring Short-Term International Stock Market Efficiency" (January 19, 2007).

Abstract:

Using standard tests of weak and semi-strong form efficiency, this paper compares and contrasts the degree of information efficiency of stock prices in 56 markets around the world. In our tests of weak form efficiency we examine the sensitivity of stock returns to market-wide, size-portfolio, and firm-specific past price information. Within countries these measures consistently yield the result that small firms are less efficiently priced than large firms; but across countries, they lead to the surprising finding that emerging markets are at least as efficient as developed markets. These findings are remarkably similar at the daily and weekly horizon and after a host of controls for trading frequency and other possible explanations. To examine semi-strong form efficiency, we compare post-earnings announcement drift in emerging and developed markets and find similar abnormal returns. We also examine the Morck, Yeung, and Yu (2000) proposed efficiency measure, R2, and, unlike our other efficiency measures, find that it performs poorly within countries, while across countries it is not associated with institutional quality variables as originally proposed. Overall, we find that emerging markets are just as efficient as developed markets at incorporating simple forms of public information into prices and no evidence that better country-level legal, regulatory, and governance characteristics are positively related to higher levels of efficiency.