The Impact of Deregulation on Stock Market Efficiency

Abstract

This study discusses the gradual shift of the Taiwanese government toward deregulation. Using the traditional variance ratio, nonparametric-based variance ratio tests and a rolling variance ratio test, this study examines the impact of liberalization on market efficiency in Taiwan. The results of the variance ratio test show that the deregulation of the activities of QFIIs is good for Taiwanese market efficiency during the first and third deregulations for foreign investors. Using a fixed-sized rolling window, this study shows that the policy of liberalization helps improve market efficiency, and disproves the weak form of the efficient markets hypothesis. The results of this study have practical implications for regulators wishing to attract international capital into their market in order to help improve market efficiency in emerging markets.

Keywords: variance ratio tests, rolling variance ratio test, foreign deregulation

JEL Classification: C14, G14, G18