Stock Market Liberalization and Informational Efficiency in Emerging Markets: New Consideration and Tests

Bank & Markets, No. 84, 2006

Posted: 26 Mar 2007


On testing the impact of stock market liberalization on weak form market efficiency in emerging market countries, previous studies often provide divergent results. This paper revisits this empirical literature by using a time-varying parameter model which enables us to handle the gradual effects induced by stock market liberalization on informational efficiency. The model also corrects for both the serial correlation in return structure and volatility risk premium of local markets. First, we show that while some markets tend to converge to more efficient markets in the aftermath of stock market liberalization, others moved away from efficient state. For markets which were already efficient before financial liberalization implementations, the informational efficiency appears to be more apparent in recent years. Second, although we document significant effects of stock market liberalization on efficiency after controlling for economic and political perspectives, the direction of effects remains inconclusive because empirical results tend to be country-specific. Finally, it is worth noting that conditional stock market volatility has no significant impact on the expected returns.

Keywords: Emerging markets, Stock market liberalization, Weak form efficiency, Time-varying predictability of stock returns, GARCH-in-Mean effect, Kalman Filter

JEL Classification: G14, G15, G18

Suggested Citation

Nguyen, Duc Khuong and Fontaine, Patrice C., Stock Market Liberalization and Informational Efficiency in Emerging Markets: New Consideration and Tests. Bank & Markets, No. 84, 2006, Available at SSRN:

Duc Khuong Nguyen (Contact Author)

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006


Patrice C. Fontaine

Eurofidai (CNRS) ( email )

150, rue de la Chimie - EUROFIDAI UMS CNRS 2748
UGA domaine universitaire
Grenoble Cedex 9, 38058

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