Predictability in securities price formation: differences between developed and emerging markets

Abstract

Purpose – This paper examines whether there are differences in the nature of the price discovery process across established versus emerging stock markets using a twenty-country sample. Design/methodology/approach – The authors analyse security returns for traces of predictability or non-randomness using variance ratio tests, Granger-Causality models and runs tests. Findings – The findings pinpoint at predictabilities which seem inconsistent with market efficiency, and they suggest that the inherent cause of predictability differs across groups. Research limitations/implications – The authors present empirical evidence which may be used to attain a deeper understanding of the links between predictability and market efficiency, in view of the conflicting evidence in prior literature. Practical implications – Whilst the pricing process in emerging markets may be hindered by delayed adjustments, in case of established markets it seems that there is a higher tendency for price reversals which could be due to prior over-reactions. Originality/value – This study presents evidence of substantial differences in predictability across developed and emerging markets which was gleaned through the rigorous application of different empirical tests.

Keywords

• delayed price adjustments
• emerging markets
• granger-causality
• liquidity
• over-reactions
• predictability
• price discovery
• runs tests
• variance ratio tests
• vector autoregression
• g10
• g12
• g14
• g15