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

Silvio John Camilleri, Semiramis Vassallo and Ye Bai

Journal of Capital Markets Studies, 2020, vol. 4, issue 2, 145-166

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 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jcmspp:jcms-07-2020-0025

DOI: 10.1108/JCMS-07-2020-0025

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