Weak-form market efficiency and corruption: a cross-country comparative analysis

Özgür İcan and Taha Buğra Çelik

Journal of Capital Markets Studies, 2023, vol. 7, issue 1, 72-90

Abstract: Purpose - The economic and administrative conditions of countries normatively have an effect on the economy and level of market development. Moreover, it is of great importance for a healthy economy whether the public institutions and organizations are transparent and functioning in accordance with their purpose. The aim of this study is to show whether there is a relationship between transparency and market efficiency. Design/methodology/approach - Correlation analysis has been conducted between prediction accuracy rates, which are obtained by seven different machine learning algorithms and Corruption Perception Index (CPI) levels. Findings - It has been statistically shown that the indices of countries with low corruption levels are harder to predict, which, in turn, can be interpreted as having higher weak-form market efficiency. According to that, an intermediate negative correlation has been found between CPI scores and predictability levels of stock indices. Considering the findings, it can be interpreted that the markets of countries with relatively more transparent and well-functioning public sector have more weak-form market efficiency. Research limitations/implications - The study can be extended with cutting-edge machine learning and deep learning techniques in future studies. There are very few studies which try to explain factors related to market efficiency. Thus, the authors claim that there is still room for further research in order to determine the factors related to market efficiency, implying that current literature is still far from explaining the causation behind the inefficiencies. Practical implications - According to findings, the markets of countries with relatively more transparent and well-functioning public sector have more weak-form market efficiency. Based on these findings, in practice, it can be said that more successful predictions can be made using machine learning algorithms in countries with relatively lower CPI scores. Originality/value - In literature, the factors related to market efficiency are still far from explaining the causation behind the inefficiencies. Thus, it has been investigated whether transparent and well-functioning public institutions and organizations have any relation with market efficiency.

Keywords: Efficient market hypothesis; Corruption perception index; Machine learning; Stock market prediction; C45; C53; C58; G14; G17; G18 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jcmspp:jcms-12-2022-0046

DOI: 10.1108/JCMS-12-2022-0046

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