Market Efficiency in Emerging Markets: Does the Legal System Matter?

26 Pages Posted: 14 May 2009 Last revised: 26 May 2009

See all articles by Carmen Cotei

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Benjamin A. Abugri

Southern Connecticut State University - Department of Economics and Finance

Date Written: May 14, 2009

Abstract

This paper investigates the question of market efficiency in a sample of thirty-four emerging markets with different legal systems. We use both dollar and local currency returns to examine whether exchange rate effects can improve our understanding of the information flows in these capital markets. Using various tests, we find that market efficiency rate is higher for dollar denominated returns than for local currency returns. Contrary to our predictions, we find weak evidence that one country’s legal system contributes to the level of market efficiency. At the minimum, we can state that for local currency returns, civil law countries seem to have markets that are more efficient compared to those in common law countries. Overall, the findings are consistent with the suggestion that exchange rate reforms as well as exchange rate fluctuations may introduce biases that can affect market efficiency.

Keywords: Market efficiency, emerging markets, random walk hypothesis, legal system

JEL Classification: G14, G15

Suggested Citation

Cotei, Carmen and Farhat, Joseph and Abugri, Benjamin A., Market Efficiency in Emerging Markets: Does the Legal System Matter? (May 14, 2009). Available at SSRN: https://ssrn.com/abstract=1404572 or http://dx.doi.org/10.2139/ssrn.1404572

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance ( email )

United States

Joseph Farhat (Contact Author)

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

Benjamin A. Abugri

Southern Connecticut State University - Department of Economics and Finance ( email )

New Haven, CT 06515
United States

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