Econometrics of Measuring Frontier Equity Market Efficiency

Abstract

There are two main purposes for conducting tests of market efficiency in frontier emerging equity markets: (1) to detect allocational inefficiencies in the market, and (2) to detect unexploited profit opportunities, which imply informational inefficiency. The first purpose can be viewed in a larger economic context, where allocational efficiency implies that capital resources are channeled to those firms which are most deserving of investment. Those companies are projected to create an economic benefit to society as a whole by developing products or services that enjoy sufficient demand and that succeed in generating at least the minimum required rate of return for the companies’ shareholders.