Financial Market Efficiency, Expectations, and Dynamics

Abstract

Policy makers of developing countries that are in the process of financial market liberalization need to have an understanding of the underlying forces that cause freely operating financial markets to be stable or unstable. Such an understanding could influence the manner in which financial reform policies are implemented and the effects of these policies on market behavior. The expectations of market participants about risk and returns on financial assets, and the confidence with which such expectations are held, are the principal factors that explain price stability or instability tendencies in liberalized financial markets.