This doctoral thesis consists of three essays on the nature and evolution of informational efficiency in an emerging market context. Each essay uses firm and aggregate level data from an emerging market, namely the Trinidad and Tobago Stock Exchange (TISE). The first essay explores the state of informational efficiency in an emerging market setting and how this efficiency evolves over time. It addresses a key issue in the emerging markets informational efficiency literature: informational efficiency is not a static feature of markets but evolves over time with changes in market features and the investor behaviour. The analysis initially applies a battery of econometric tests of the random walk (variance ratio and signed-rank tests) to the full sample returns of aggregate and stock level data from the TISE, to determine whether the market is informational efficient. The findings show that the market is informationally inefficient at the aggregate level, which is accounted for by the severe lack of efficiency in the bulk of stocks traded on the exchange. This result could imply that by and large, stock prices in an emerging market setting may not be accurate signals for resource allocation. The next part of the analysis considers whether this state of informational efficiency varies over time, by applying the more robust signed-rank test in a rolling sub-sample framework to the stock and aggregate level data. The analysis shows that over time, there are transient periods of informational efficiency, which alternate with periods of inefficiency at the aggregate market level. This pattern of time-varying efficiency is largely mirrored by the Banking stocks of the TISE. Such results could mean that informational efficiency in an emerging market setting may improve in some periods but worsen in others. This does not conform to the classical Efficient Markets Hypothesis, which claims that markets should show a clear trend toward higher states of efficiency over time. The second essay analyses the effects of several market microstructures and financial reforms on time-varying informational efficiency in an emerging market setting. It uses data from the TISE, which is measured at the firm level for the microstructure variables. This allows for the analysis to extract the precise effects of microstructures on efficiency, which may otherwise be hidden by aggregate level data. The analysis is done within a panel regression framework. We find that improvements in the microstructure variables, including liquidity, volatility, automation and the number of shareholders enhance informational efficiency over time. However, the financial reforms, including financial liberalisation and regulation, do not alter efficiency in this analysis. We further find that the liquidity and total shareholders of the banking firms have a greater impact on efficiency, in relation to the other listed firms. Taken together, the results could imply that market microstructures playa more important role in causing informational efficiency in an emerging market setting to evolve over time. The third essay explores price predictability from a lead-lag cross autocorrelation perspective. In particular, it considers whether the degree of institutional investment across firms induces lead-lag cross-autocorrelation among stocks. The analysis is conducted by applying returns data at the firm level from the TISE in a Vector Autoregressive (VAR) framework. It is found that the institutionally favoured stocks (HI) "lead" the institutionally unfavoured stocks (LO), as the returns of HI predict the returns of LO better than vice versa. Moreover, HI stocks are also found to lead the TISE market portfolio. These patterns of predictability arise because the stock prices of high institutionally owned firms adjust faster to market-wide information, which implies that these prices are more informationally efficient. It is also found that the extent to which HI leads LO increases with the liquidity of the institutionally favoured stocks and the illiquidity of stocks that are not favoured by institutions. Collectively, the results of this essay provide evidence of the positive role played by institutional investors in the price adjustment process: stocks with a high degree of institutional ownership have a faster speed of adjustment, making them more informationally efficient.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:582008 |
| Date | January 2012 |
| Creators | Arjoon, Vaalmikki |
| Publisher | University of Nottingham |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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