Stock Market Efficiency and Integration: A Study of Eight Economies in the Asia-Pacific Region

Abstract

A stock market is considered to be efficient if it accurately reflects all the relevant information in determining security prices. In international stock markets, if the assets with identical risks offer similar level of expected returns, then markets are said to be integrated. This paper investigates the stock market efficiency and integration of eight selected economies in the Asia-Pacific region. The sample is composed of 4 Emerging/ Developing (Sri Lanka, China, Malaysia and Pakistan) and 4 Developed (Australia, Hong Kong, Japan and Singapore) markets. The motivation of this paper is twofold. The first objective is to investigate whether the selected stock markets are efficient at individual level, while the second is to examine whether international diversification is effective. The results revealed that there is no evidence against the efficiency of Japan's stock market while markets of Sri Lanka, Pakistan and Australia are proved to be inefficient. For China, Malaysia, Hong Kong and Singapore, the tests gave inconclusive results with regard to market efficiency. The cointegration analysis confirmed that there are no long-run co-movements between the stock prices, and thus international diversification within economies in the sample is effective.