Market Efficiency in Emerging Markets: Does the Legal System Matter?

Abstract

This paper investigates the question of market efficiency in a sample of thirty-four emerging markets with different legal systems. We use both dollar and local currency returns to examine whether exchange rate effects can improve our understanding of the information flows in these capital markets. Using various tests, we find that market efficiency rate is higher for dollar denominated returns than for local currency returns. Contrary to our predictions, we find weak evidence that one country’s legal system contributes to the level of market efficiency. At the minimum, we can state that for local currency returns, civil law countries seem to have markets that are more efficient compared to those in common law countries. Overall, the findings are consistent with the suggestion that exchange rate reforms as well as exchange rate fluctuations may introduce biases that can affect market efficiency.