Testing the efficiency of emerging markets: Evidence from nonlinear panel unit tests

Neslihan Turguttopbaş,Tolga Omay

doi:10.2298/pan200309011t

Abstract

In this study, we investigate market efficiency considering nonlinearities by testing the weak-form market efficiency of the stock markets of Brazil, China, Russia, Turkey, and South Africa using recently proposed nonlinear panel unit root tests. The stock markets of these emerging countries are deliberately selected for their market capitalization to form a homogenous panel. The results of nonlinear models indicate that the stock market indexes are stationary and weak-form inefficient. This finding contributes to the contradictory results of the prior research using linear and nonlinear models about the efficiency of emerging stock markets in favor of nonlinear ones. Furthermore, we propose that studies using financial variables consider such nonlinearity in order to achieve more accuracy in findings related to such studies.

Highlights

Efficient market hypothesis (EMH) proposes that security prices always and fully reflect all available information (Fama, 1970, p. 383)
The weekly stock market indexes of Russia, Brazil, China, South Africa, and Turkey covering the period from October 2009 to October 2019 are considered
The weekly data are collected from Thompson Reuters, and these countries form a set of alternatives with similar risk and return estimates from an equity investor’s perspective

Summary

Introduction

Efficient market hypothesis (EMH) proposes that security prices always and fully reflect all available information (Fama, 1970, p. 383). If current prices reflect all information, any price change should result from new information to which the market reacts This presumption suggests that investors can achieve no gain by speculation as prices reflect all available information. From this definition, it is inferred that as the release of new information is unknown and unpredictable in terms of its timing and nature for market participants, the price changes should be unpredictable and random as a result. From an investor's perspective, less efficient markets are preferable as there possibly exist abnormally high returns This inference paves the way for researchers to test the efficiency of stock markets of emerging countries. Since the number of such studies is limited, there is no consensus about emerging stock markets' efficiency

Methods

Results

Conclusion