An Empirical Examination of Financial Liberalization and the Efficiency of Emerging Market Stock Prices

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.