**Testing the Information Efficiency in Emerging Markets Testing the Information Efficiency in Emerging Markets**

DOI: 10.5772/intechopen.70369

Ceyda Aktan, Eyyup Ensari Sahin and

Ceyda Aktan, Eyyup Ensari Sahin and Ilhan Kucukkaplan Ilhan Kucukkaplan Additional information is available at the end of the chapter

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.70369

#### **Abstract**

One of the most common issues for investors regarding markets nowadays is to what extent these markets are efficient as all of them aim to increase their gains and beat the market as much as possible. This competition among them will inevitably result in markets becoming efficient and, therefore, prices quickly adjusting to the new coming information. Eventually, investors will most probably receive only a sum that makes up for the risk they took and the time value of money they invested. This is where market efficiency, its theory and forms come into question. There have been many researches conducted assessing the efficiency of different markets located throughout the world. However, there are still a lot of gaps in research involving emerging economies which needs to be completed for the sake of investment decisions. Therefore, the purpose of this chapter is to is to show how information efficiency relates to the stock markets of emerging economies, how it implicates investors, analyze the stock prices of 24 emerging economies to look for their weak form efficiency, and to put forward a set of commonalities found in results of literature relating to emerging market information efficiency.

**Keywords:** information efficiency, efficient market hypothesis, emerging economies, weak form of efficiency, anomalies

### **1. Introduction**

One of the most common issues for investors regarding markets nowadays is to what extent these markets are efficient as all of them aim to increase their gains and beat the market as much as possible. But what do we mean by 'efficiency'? The term 'efficiency' is used in many different contexts with different meanings. If we look at the productivity side, efficiency is

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used to refer to a situation where the quantity produced is at such a level that the more you produce from this point onwards it will lead to a fewer productions of the other. In a similar context, one can also think of Pareto efficiency: distribution or resources to make one better off but at the expense of another [1].

When analysing financial markets, whether these markets are from a developed or from an emerging economy, the term 'efficiency' refers to the informational efficiency of the market, which is about the degree of information reflected in the prices of financial assets [2]. It reflects how the financial asset prices adapt to the incoming information. The quicker it reflects the more informational efficient the market will be, making it hard for these investors to beat the market [3, 4].

In this chapter, we will be explaining the efficient market hypothesis (EMH), which is the main theory behind information efficiency; relevant definitions will be given and the different forms of efficiencies will be identified using previous studies. Possible anomalies will also be talked about. The chapter will end with a discussion on the technical and fundamental analysis in the usage of efficient market hypothesis as the basis of investment policies and an application part, where the stock market prices of the 24 identified emerging economies of the world are analysed using an augmented Dickey-Fuller (ADF) test to observe whether they contain a unit root or not. All of these parts will be explained in relation to information efficiency of emerging economies. There are specific characteristics of these markets that make them attractive for analysis and for investors, such as lower than average income per capita, high volatility, rapid growth, higher than the average return and less-mature capital markets [5]. These characteristics which make emerging economies unique in the study of market efficiency will also be incorporated within the chapter.
