The Effect of Financial Liberalization on Informational Efficiency in Developing Economies: Evidence from State Space and GMM Models

Document Type : Research Paper


1 MSc. Department of Financial Management, Ayatoah Amoli Branch, Isamic Azad University, Amol, Iran.

2 Assistant Prof, Department of Accounting, Ayatoah Amoli Branch, Isamic Azad University, Amol, Iran.


Objective: After beginning of stock markets liberalization in mid-1980, integration of these markets into global markets is increasing. The countries are attempting to attract international investors to divide their portfolio risk, increase liquidity level and promote informational transparency and hence improve stock market efficiency. This study investigates the effects of financial liberalization on stock market informational efficiency in developing economies, during 2000-2016.
Methods: With regarding to informational efficiency level in economies with developing characteristics is time-varying because of benefit from their investor experiences and increase of informational access and quality. In order to, we applied a state space model with GARCH effects to determine the degree of informational efficiency during time for any selected countries. In continue, we use panel GMM model that allow measuring and assessing the impact of financial liberalization on the informational efficiency.
Results: The results of state space model realized the weak efficiency hypothesis in selected countries. In other words, the past returns do not contribute much to anticipate future returns, but it affected by macroeconomic, external shocks and political events. Also, the results of GMM model indicate that financial liberalization significantly (of course tiny) improves the degree of informational efficiency. Likewise, we found that information variable (turnover) and macroeconomic variables (inflation rate and exchange rate volatilities) would strengthen significantly informational efficiency in developing countries.
Conclusion: This research contributes to improving informational efficiency in developing economies, this is necessary to implement financial liberalization process as well as improving macroeconomic circumstance and declining exchange rate volatilities.


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