- Title
- Market efficiency and limits to arbitrage in advanced emerging markets
- Creator
- Seif, Mostafa
- Relation
- University of Newcastle Research Higher Degree Thesis
- Resource Type
- thesis
- Date
- 2016
- Description
- Research Doctorate - Doctor of Philosophy (PhD)
- Description
- This thesis has two key motivations. The first is to undertake a comprehensive examination of the market characteristics and institutional features across nine ‘advanced emerging’ stock markets: Brazil, Czech Republic, Hungary, Malaysia, Mexico, Poland, South Africa, Taiwan and Turkey. After identifying that these markets comprise characteristics that may restrict rational investors from arbitraging away identifiable mispricing, the second purpose of this thesis is to examine the level of market efficiency and the relation between mispricing and limits to arbitrage. Given limitations with the depth and quality of accounting information across emerging markets, the issue of market efficiency is examined by testing whether returns and volatility-based anomalies that have been identified in developed markets are also evidenced across this sample. More specifically, this thesis examines the prevalence of seasonality in both returns and volatility of returns with respect to five calendar anomalies that have been identified in the context of developed markets. In addition, this thesis examines whether there is evidence of a negative relationship between maximum one-day returns and subsequent monthly returns (referred to as the MAX effect) in advanced emerging markets. Despite an extensive number of studies documenting evidence of seasonal anomalies and the MAX effect in developed markets, which indicates that these markets are less than perfectly efficient, this thesis provides the first comprehensive examination of this issue across advanced emerging markets. This thesis also expands the existing literature by examining the potential sources of such anomalous returns and the existence of mispricing in these markets by testing whether the returns can be explained by risk-based pricing models or time series variation in limits to arbitrage. The results of this thesis provide evidence of the existence of strong anomalous returns, which indicates a high level of mispricing across advanced emerging stock markets. Specifically, this thesis finds that, on average, returns are higher during the month of December, the 44th week of the year, Fridays and pre- and post-holidays; and these anomalous returns are not explained by seasonal variation in volatility. Moreover, this thesis reports evidence of a strong MAX effect that is persistent after controlling for size, book to market ratio, market beta, momentum, short-term return reversals and liquidity. The magnitude of the mispricing associated with the MAX effect appears to be higher in advanced emerging markets compared with developed markets. The zero-investment returns generated by the MAX effect are shown to co-vary with time series variation in limits to arbitrage. Taken as a whole, these results suggest a lower level of efficiency across advanced emerging markets that can be explained by the market characteristics and institutional features that restrict the ability of rational investors to arbitrage away mispricing. The results reported in this thesis can therefore allow investors to better understand the characteristics of risk and returns in advanced emerging markets in order to develop improved asset pricing models in the context of these markets. In addition, the demonstrable link between asset pricing anomalies and limits to arbitrage may provide policy makers with a framework for improving the efficiency of their stock markets by mitigating market frictions through investor protection measures, and relaxation of capital controls and short-selling restrictions, among others.
- Subject
- emerging markets; limits of arbitrage; market efficiency; anomalies; seasonality; MAX effect; mispricing
- Identifier
- http://hdl.handle.net/1959.13/1322467
- Identifier
- uon:24587
- Rights
- Copyright 2016 Mostafa Seif
- Language
- eng
- Full Text
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| Thumbnail | File | Description | Size | Format | |||
|---|---|---|---|---|---|---|---|
| View Details Download | ATTACHMENT01 | Thesis | 2 MB | Adobe Acrobat PDF | View Details Download | ||
| View Details Download | ATTACHMENT02 | Abstract | 75 KB | Adobe Acrobat PDF | View Details Download |