Informational Efficiency in Developing Equity Markets

32 Pages Posted: 15 Feb 2006

See all articles by Paul Anthony Cashin

Paul Anthony Cashin

International Monetary Fund (IMF)

C. John McDermott

Reserve Bank of New Zealand

Date Written: June 1995


The issue of informational efficiency in the evolution of asset prices is examined using data on equity markets in Jordan, Turkey and Pakistan over the period 1986-93. The analysis is carried out in two steps. The parameters of agents` dynamic consumption and investment decisions are first estimated, and then the implied equity market price, based on market fundamentals, is compared with the actual evolution of equity market prices. While the informational efficiency of each of the three markets is found to be deficient, the causes of market inefficiency are varied. For Jordan it appears that a large negative shock to economic activity in the late 1980s caused agents to discount market fundamentals. For Turkey and Pakistan it is likely that institutional and legal rigidities in equity and banking markets resulted in these markets being illiquid, although this lack of market depth did reduce in severity for Turkey over the sample period, as liberalization of financial markets occurred.

JEL Classification: C52, E21, G12

Suggested Citation

Cashin, Paul Anthony and McDermott, C. John, Informational Efficiency in Developing Equity Markets (June 1995). IMF Working Paper No. 95/58, Available at SSRN:

Paul Anthony Cashin (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

C. John McDermott

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand

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