Why Do Emerging Stock Markets Experience More Persistent Price Deviations from a Random Walk Over Time? A Country-Level Analysis

Abstract

This study employs the rolling bicorrelation statistic to measure the degree of stock price deviations from a random walk for the stock markets of 50 countries over the period 1995-2005. We find that stock markets in economies with low per capita GDP in general experience more persistent price deviations than those in the high income group. This clustering effect is not due to market liquidity or other structural characteristics, but instead can be explained by cross-country variations in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets being dominated by sentiment-prone noise traders whose correlated trading cause stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.

Keywords: random walk, weak-form market efficiency, degree of market efficiency, determinants of market efficiency, private property rights

JEL Classification: G14, G15, G38, C49, N20