“The chief concerns of EMEs (emerging market economies) in relation to their financial systems remain developmental rather than regulatory: increasing financial savings to accelerate growth and development, and deepening their financial system to develop long term funding instruments for infrastructure financing, absorb large inflows of capital to counter the uphill backwash from EMEs to AMEs, reduce the cost of capital and reduce the leads and lags in monetary policy transmission. Advanced market economies (AMEs), on the other hand, need major regulatory changes that inoculate them more effectively against the new risks their financial systems face.” As well as investigating these observations, this chapter is aimed at investigating the validity of Efficient Markets Hypothesis and Efficient Capital Markets Hypothesis in emerging economies – as contrasted with advanced market economies. In so doing, it aims to contribute to the extant literature on stock market liquidity and liquidity in capital markets.
TopIntroduction
The chief concerns of EMEs (emerging market economies) in relation to their financial systems remain developmental rather than regulatory: increasing financial savings to accelerate growth and development, and deepening their financial system to develop long term funding instruments for infrastructure financing, absorb large inflows of capital to counter the uphill backwash from EMEs to AMEs, reduce the cost of capital and reduce the leads and lags in monetary policy transmission. advanced market economies (AMEs), on the other hand, need major regulatory changes that inoculate them more effectively against the new risks their financial systems face. (Sheel & Ganguly, 2016: 197).
As well as investigating these observations, this chapter is aimed at investigating the validity of Efficient Markets Hypothesis and Efficient Capital Markets Hypothesis in emerging economies – as contrasted with advanced market economies. In so doing, it aims to contribute to the extant literature on stock market liquidity and liquidity in capital markets. Results appear to confirm the theory that stock market liquidity impacts and influences the ability of the market to fully reflect information.
Recent financial regulatory reforms which embrace Basel III regulations and Volcker rules – along with their impact and the issues presented for EMDEs (emerging market and developing economies), will be also considered in this chapter.
Sheel and Ganguly (2016:197) also argue that the immediate impact of recently introduced financial regulatory reforms are most likely to take effect in the “relatively lightly regulated AMEs”, rather than, in their opinion, the more tightly regulated EMEs.
The literature review section however, highlights concerns which have been expressed by EMDEs (emerging market and developing economies) as a result of recent regulatory reforms. This also raises concerns as to whether such reforms may have had greater far–reaching unintended consequences which are currently impacting the growth of these economies than originally expected or anticipated.
In line with the theme of the volume, the chapter will amongst other objectives, aim to contribute to the extant literature on whether capital markets in emerging markets economies, in particular, fully reflect information - hence demonstrating and highlighting the validity of the Efficient Markets Hypothesis (as well as the Efficient Capital Markets Hypothesis.
It will attempt to realize this aim by way of reference to an evaluation and analyses of determinants of stock market developments – as well as stock market liquidity.
TopBackground And Literature Review
In their findings (1999), Garcia and Liu conclude that:
- 1.
Real income, saving rate, financial intermediary development, and stock market liquidity are important determinants of stock market capitalization;
- 2.
Macroeconomic volatility does not prove significant; and
- 3.
Stock market development and financial intermediary development are complements instead of substitutes.
Further, stock market development is considered by Garcia and Liu (1999:30) to be a multi-dimensional concept which is usually measured by stock market size, liquidity, volatility, concentration, integration with world capital markets, and the legal rule (regulation and supervision) in the market. Market capitalization is employed by them as a measure for stock market development in their study since, in their opinion, “it is a good proxy for such general development because it is less arbitrary than other individual measures and indexes of stock market development.”
In explaining the differences in stock market development in the major stock markets in Latin America as compared with those in East Asia and selected industrial countries, pooled data for fifteen countries from a period ranging 1980 to 1995, are also used in their study (see 1999: 31) and the countries involved include seven countries in Latin America, six countries in East Asia, and two industrial countries: the United States and Japan.
As well as examining, common determinants of stock and bond liquidity over the period 1991 through 1998, Chordia, Sarkar and Subrahmanyam (2001:21) also examine the impact of financial crises, monetary policy, and mutual fund flows on financial market liquidity. The results of their findings are as follows (2001:21,22):