Predictability in securities price formation: differences between developed and emerging markets

Purpose: This paper examines whether there are differences in the nature of the price discovery process across established versus emerging stock markets using a twenty-country sample. Design/methodology/approach: The authors analyse security returns for traces of predictability or non-randomness using variance ratio tests, Granger-Causality models and runs tests. Findings: The findings pinpoint at predictabilities which seem inconsistent with market efficiency, and they suggest that the inherent cause of predictability differs across groups. Research limitations/implications: The authors present empirical evidence which may be used to attain a deeper understanding of the links between predictability and market efficiency, in view of the conflicting evidence in prior literature. Practical implications: Whilst the pricing process in emerging markets may be hindered by delayed adjustments, in case of established markets it seems that there is a higher tendency for price reversals which could be due to prior over-reactions. Originality/value: This study presents evidence of substantial differences in predictability across developed and emerging markets which was gleaned through the rigorous application of different empirical tests.