a1 Labuan School of International Business and Finance, Universiti Malaysia Sabah and Monash University
a2 Monash University
This paper employs the rolling bicorrelation test to measure the degree of nonlinear departures from a random walk for aggregate stock price indices of fifty countries over the sample period 1995–2005. We find that stock markets in economies with low per capita GDP in general experience more frequent price deviations than those in the high-income group. This clustering effect is not due to market liquidity or other structural characteristics, but instead can be explained by cross-country variation in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets dominated by sentiment-prone noise traders whose correlated trading causes stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.
c1 Address correspondence to: Kian-Ping Lim, Labuan School of International Business and Finance, Universiti Malaysia Sabah, Jalan Sungai Pagar, 87000 F.T. Labuan, Malaysia; e-mail: [email protected].
This paper was prepared from Chapter 4 of the first author's Ph.D. thesis at Monash University. We acknowledge valuable comments on an earlier draft of this paper from Melvin Hinich, Tuck-Cheong Tang, Jae Kim, Rachel Campbell, Paul Kofman, Javed Iqbal, and other participants at the Monash University EBS/ECO seminar, Monash BUSECO Faculty Research Conference 2007, FIRN Doctoral Tutorial 2007, 20th Australasian Finance & Banking Conference, Deakin University seminar, 16th Annual Conference on PBFEAM, and WEAI 83rd Annual Conference. The first author would also like to thank the Universiti Malaysia Sabah for his Ph.D. scholarship.