Are Emerging Markets More Profitable? Implications for Comparing Weak and Semi-Strong Form Efficiency

Abstract

Using data from 56 markets, we find that short-term reversal, post-earnings drift, and momentum strategies earn similar profits in emerging and developed markets. Portfolio-level variance ratios and market delay measures show greater deviations from efficiency in developed markets and firm-level variance ratios are similar across emerging and developed markets. Conceptually, we show that efficiency tests can yield misleading inferences because they do not control for the information environment. Our evidence corrects misperceptions that emerging markets feature larger trading profits and higher return autocorrelation, highlights crucial limitations of weak and semi-strong form efficiency measures, and points to the importance of measuring informational aspects of efficiency.

Keywords: market efficiency, information efficiency, synchronicity, international finance, earnings announcements, emerging markets

JEL Classification: F30, G14, G15