REVISITING THE (IN) EFFICIENCY OF EMERGING STOCK MARKETS

Previous evidence on market efficiency in emerging economies could be tainted by the presence of' thin trading and price non-linearity. We examine the impact of' thin trading by decomposing weekly stock returns into permanent and cyclical components and then subject the permanent component (correct index) to a battery of efficiency diagnostic tests: and account for price non-linearity by modeling stock returns in the context of an EGARCH-in-mean Our results from weekly returns in twenty emerging markets are unanimous in rejecting efficiency in all markets after adjustments for thin trading and price non-linearity. We also find evidence that regulatory reforms have enhanced market efficiency but only in some of the sampled markets. implying that emerging markets can benefit from further regulatory changes. Until then. though. several emerging markets remain a potential lucrative source of arbitrage opportunities for international investors