Market efficiency : a comparison between established and emerging markets

Abstract

This study examines the market efficiency of stock market indexes. Daily returns for ten established (Australia, Canada, France, Germany, Hong Kong, Israel, Japan, Sweden, UK and the US) and ten emerging markets (Brazil, Chile, China, Greece, India, Malaysia. Mexico, Poland, Russia and South Africa) are analysed for random walks using Runs Tests and VAR Granger-Causality Test. VAR estimations were used to model stock market index returns with the MSCI All Country World Index (ACWI) returns and this relationship was evaluated through Granger-Causality. Results from Granger-Causality suggest that Israel was the only efficient market. While we couldn’t identify whether the remaining markets were efficient or not due to non-synchronous trading and time-zone differences. The VAR models gave us the possibility to compare market efficiency between stock market indexes and the ACWI. Indications suggest that Canada, France Israel, Brazil, China and Greece were the only markets to be considered more efficient than the MSCI ACWI. The Nonparametric Runs Test for randomness was used since the returns of all the 20 stock market indexes didn’t follow the normal distribution. Market inefficiency was only found for Chile, Greece, India, Japan, Malaysia, Mexico and the U.S, The runs test also confirmed that Israel was efficient substantiating the results, we obtained in the VAR Model and Granger Causality Test.