Abstract
The paper explores the difference in efficiency between developed and emerging stock market from a long memory perspective for the period 2000 to 2015. Ten developed, and ten emerging countries were selected for the study based on Morgan Stanley Capital International’s classification. We used both rescaled range and detrended fluctuation analysis and supplemented the findings with estimates of the fractionally integrated parameter for stock market return, its volatility as well as its absolute return using spectral regression. Findings are supportive of the absence of long memory in returns but support presence of long memory in absolute returns and volatility. We conclude that co-movement and spillover between stock markets have affected the market efficiencies and the efficiency of the emerging stock markets is no longer very different from that of the developed stock markets.
Highlights
Emerging market finance has attracted the attention of researchers and practitioners since the early nineties
For rescaled range statistic we find the ratio of the range of the sum of the deviations from the local mean divided by the standard deviation from the mean
While applying t-test for the null hypothesis that means of each series is 0.5 we get the following observations: The findings as reported in Table 3 indicate that the hypothesis of Hurst exponent equaling 0.5 is rejected for all the return series and long memory is weak for return series while squared, and absolute return series shows strong, persistent behaviour
Summary
Emerging market finance has attracted the attention of researchers and practitioners since the early nineties. Long range dependence generally suggests nonlinear structure in asset returns Such long-range dependence structure indicates that returns can be predicted, the efficient market hypothesis is violated, and applicability of random walk in stock prices is challenged. It would raise concern regarding linear modelling, forecasting, statistical testing of pricing models based on standard statistical methods, and theoretical and econometric modelling of asset pricing. Taking data from stock market indices of ten developed and ten emerging markets we run tests for long memory and find out the comparative scenario.
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