This article focuses on the deviations from normality of stock returns before and after a financial liberalisation reform, and shows the extent to which inference based on statistical measures of stock market efficiency can be affected by not controlling for breaks. Drawing from recent advances in the econometrics of structural change, it compares the distribution of the returns of five East Asian emerging markets when breaks in the mean and variance are either (i) imposed using certain official liberalisation dates or (ii) detected non-parametrically using a data-driven procedure. The results suggest that measuring deviations from normality of stock returns with no provision for potentially existing breaks incorporates substantial bias. This is likely to severely affect any inference based on the corresponding descriptive or test statistics.
Al-Abdulqader, K.A. , G. Hannah and D.M. Power (2007), ‘ A Test of the Weak–form of the Efficient Markets Hypothesis for the Saudi Stock Market ’, Journal of Emerging Market Finance, 6(2): 167–90 .
2.
Andreou, E. and E. Ghysels (2002), ‘ Multiple Breaks in Financial Market Volatility Dynamics ’, Journal of Applied Econometrics, 70: 9–38 .
3.
Bauwens, L. , A. Preminger and J. Rombouts (2006), ‘Regime Switching GARCH Models’, Working Paper, Université catholique de Louvain .
4.
Bekaert, G. and C.R. Harvey (1997), ‘ Emerging Equity Market Volatility ’, Journal of Financial Economics, 43: 29–78 .
5.
Bekaert, G. and C.R. Harvey (2000), Foreign Speculators and Emerging Equity Markets , Journal of Finance, 55: 565–613 .
6.
Bhattacharya, U. and H. Daouk (2002), ‘ The World Price of Insider Trading ’, Journal of Finance, 57: 75–108 .
7.
Bollerslev, T. (1987), ‘ A Conditionally Heteroscedastic Time Series Model for Speculative Prices and Rates of Return ’, Review of Economics and Statistics, 69: 542–47 .
8.
Clark, P.K. (1973), ‘ A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices ’, Econometrica, 411: 135–55 .
9.
Cuñado, J. , J.G. Biscarri and F.P. de Gracia (2006), ‘ Changes in the Dynamic Behavior of Emerging Market Volatility: Revisiting the Effects of Financial Liberalization ’, Emerging Markets Review, 7: 261–78 .
10.
De Santis, G. and S. Imrohoroglu (1997), ‘ Stock Returns and Volatility in Emerging Financial Markets ’, Journal of International Money and Finance, 16: 561–79 .
11.
Demetriades, P.O. , M. Karoglou and S.H. Law (2007), ‘One Date, One Break?’ Working Paper, University of Leicester .
12.
Demetriades, P.O. and K.B. Luintel (2001), ‘ Financial Restraints in the South Korean Miracle ’, Journal of Development Economics, 64(2): 459–79 .
13.
Den Haan, W.J. and A. Levin (1998), ‘Vector Autoregressive Covariance Matrix Estimation’, Working Paper, University of California .
14.
Diebold, F.X. (1986), ‘Temporal Aggregation of GARCH Processes and the Distribution of Asset Returns’, Special Studies Papers 200, Board of Governors of the Federal Reserve System (U.S.).
15.
Fama, E.F. (1970), ‘ Efficient Capital Markets: A Review of Theory and Empirical Work ’, Journal of Finance, 25: 383–417 .
16.
Fuchs-Schundeln, N. and N. Funke (2001), ‘Stock Market Liberalisation: Financial and Macroeconomic Implications’, Working Paper, International Monetary Fund .
17.
Gray, S.F. (1996), ‘ Modelling the Conditional Distribution of Interest Rates as a Regime-Switching Process ’, Journal of Financial Economics, 42(1): 27–62 .
18.
Inclan, C. and G.C. Tiao (1994), ‘ Use of Cumulative Sums of Squares for Retrospective Detection of Changes of Variance ’, Journal of the American Statistical Association, 89: 913–23 .
19.
Islam S.M.N. , S. Watanapalachaikul and C. Clark (2007), ‘ Some Tests of the Efficiency of the Emerging Financial Markets: An Analysis of the Thai Stock Market ’, Journal of Emerging Market Finance, 6(3): 291–302 .
20.
Jayasuriya, S. (2005), ‘ Stock Market Liberalization and Volatility in the Presence of Favourable Market Characteristics and Institutions ’, Emerging Markets Review, 6: 170–91 .
21.
Jensen, M. (1978), ‘ Some Anomalous Evidence Regarding Market Efficiency ’, Journal of Financial Economics, 12: 33–56 .
22.
Judge, G.G. , W.E. Griffiths , R.C. Hill , H. Ltkepohl and T.C. Lee (1985), The Theory and Practice of Econometrics, 2nd edition. New York: John Wiley and Sons .
23.
Karoglou, M. (2006a), ‘On the Detection of Structural Changes in Volatility Dynamics with Applications’, Ph.D. Dissertation.
24.
Karoglou, M. (2006b), ‘The Size and Power of the CUSUM-type Tests in Detecting Structural Changes in Financial Markets Volatility Dynamics’, Mimeograph. University of Leicester .
25.
Karoglou, M.2009. ‘ Breaking Down the Non-normality of Stock-Returns ’, European Journal of Finance, forthcoming.
26.
Kassimatis, K. (2002), ‘ Financial Liberalisation and Stock Market Volatility in Selected Developing Countries ’, Applied Financial Economics, 12: 389–94 .
27.
Kim, E.H. and V. Singal (2000), ‘ Stock Market Openings: Experience of Emerging Economies ’, Journal of Business, 73: 25–66 .
28.
Kokoszka, P. and R. Leipus (1999). ‘ Testing for Parameter Changes in ARCH Models ’, Lithuanian Mathematical Journal, 39: 231–47 .
29.
Kokoszka, P. and R. Leipus (2000), ‘ Change-point Estimation in GARCH Models ’, Bernoulli, 6(3): 513–39 .
30.
Lamoureux, C.G. and W.D. Lastrapes (1990a), ‘ Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects ’, Journal of Finance, 451: 221–29 .
31.
Lamoureux, C.G. and W.D. Lastrapes (1990b), ‘ Persistence in Variance, Structural Change and the GARCH Model ’, Journal of Business and Economic Statistics, 8: 225–34 .
32.
Levene, H. (1960), ‘Contributions to Probability and Statistics: Essays in Honor of Harold Hotelling’, in Ingram Olkin , Sudhish G. Ghurye , Wassily Hoeffding , William G. Madow , Henry B. Mann . California: Stanford University Press.
33.
Sansó, A. , V. Aragó and J.L. Carrion (2003), ‘Testing for Changes in the Unconditional Variance of Financial Time Series’, Working Paper, Universitat de les illes Balears .
34.
Seddighi, H.R. and W. Nian (2004), ‘ The Chinese Stock Exchange Market: Operations and Efficiency ’, Applied Financial Economics, 14: 785–97 .
35.
Sheskin, D.J. (1997), Handbook of Parametric and Nonparametric Statistical Procedures, Boca Raton, FL: CRC Press .
36.
Siegel, S. and J.W. Tukey (1960), ‘ A Nonparametric Sum of Ranks Procedures for Relative Spread in Unpaired Samples ’, Journal of the American Statistical Association, 55: 429–44 .
37.
Sokal, R.R. and F.J. Rohlf (1995), Biometry: The Principles and Practice of Statistics in Biological Research, 3rd edition. New York: W. H. Freeman and Co.
38.
Summers, L.H. (1986), ‘ Does the Stock Market Rationally Reflect Fundamental Values? ’, Journal of Finance, 41: 591–601 .
