Cross-Country Determinants of Weak-Form Stock Market Efficiency: A Preliminary Exploratory Study

Abstract

The present paper extends the short-horizon return predictability literature to explore the potential determinants of weak-form market efficiency in a sample of 50 countries over the period 1995-2005. Using the proposed rolling bicorrelation test statistic, we are able to compare the extent of weak-form market efficiency for all our sampled stock markets, and identify those country-level variables that account for the cross-country differences in the degree of efficiency. The univariate regression results indicate that the stock market is more efficient in countries that: (1) liberalize their stock market and capital account; (2) exhibit higher degree of institutional collectivism; (3) achieve better governance outcomes; (4) short selling is both allowed and commonly practiced; (5) possess higher number of security analysts; and (6) have higher real per capita GDP, higher degree of trade openness, and lower level of inflation. In the multivariate settings, we found that cross-country differences in market efficiency can be explained by quality of institutions, capital account liberalization, investor protection and macroeconomic environment.

Keywords: Weak-form Efficiency, Nonlinear Predictability, Information Incorporation, Cross-country Determinants, Stock Markets

JEL Classification: G14, G15, C49