Informational Efficiency in Developing Equity Markets

June 1, 1995

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Format: Chicago

C. John McDermott, and Paul Cashin. Informational Efficiency in Developing Equity Markets, (USA: International Monetary Fund, 1995) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset prices, Consumption, Econometric analysis, Estimation techniques, Financial institutions, Financial markets, National accounts, Prices, Stock markets, Stocks

Keywords: Asset market liberalization, Asset prices, Banking market, Consumption, Estimation techniques, Financial market regulation, Global, Informational efficiency, Market efficiency, Market fundamentals, Market information, Market movement, Middle East, Rate of return, Stock markets, Stocks, Utility function, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/058
Stock No:

WPIEA0581995
ISBN:

9781451847819
ISSN:

1018-5941

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