Recently, academic researchers and professional investors have turned attention to so—called Frontier equity markets (Berger, et.al, Journal of Financial Economics 2010; Speidell, Research Foundation of CFA Institute 2011). While the definition of a frontier equity market varies among organizations who establish the criteria for the countries to designate as frontier, develop the indices and report the data, the primary criteria are liquidity screens and minimum free-float –adjusted market capitalizations relative to emerging markets (S&P/IFC 2010; MSCI Barra 2010; Russell, 2010). The typical Frontier market index divides the world into five regions, includes an average of 31 countries with an average market capitalization of roughly $700 billion. Kuwait is reported to have the largest and Kyrgyzstan the smallest equity market capitalizations among Frontier market countries at about $107 billion and $94 million, respectively (Speidell, 2011).
The research emphasis of academic and professional investors has been on topics such as their diversification potential and returns and risks.. Berger, et al,found extremely low levels of integration and, hence, significant diversification benefits. Speidell contends they offer higher returns with about the same risk as those found in emerging markets.
Market efficiency of frontier markets and its evolution, however, have not been research topics of either academic or professional investors. Our research seeks to begin to fill this void. Our objective is to empirically determine whether equity markets in three Frontier market countries have become more efficient over time. Using standard tests of weak and semi-strong efficiency we measure and analyze the informational efficiency and compare and contrast its changes over time for the countries of Barbados, Jamaica and Trinidad and Tobago.
Our choice of Barbados, Jamaica and Trinidad and Tobago is based on three factors. First, these Caribbean countries have the closest geographic proximity to the U.S. of all 47 nations classified as Frontier by the above organizations. The second reason is these three nations are the only English speaking ones among the seven countries included in the Latin America region by the above organizations; all obtained their independence from Great Britain in the early 1960s . The third reason is these three nations are all members of CARICOM and thus share similar trade and financial regulatory structures.
We have high frequency, daily closing stock market index value and volume data for each country’s stock market for the following time periods:
Jamaica; June 11, 1987 – December 31, 2011 (5,139 observations).
Trinidad and Tobago: January 3, 1983 - December 30, 2011 (4,369 observations).
Barbados; January 5, 1999 - December 30, 2011 (2,236 observations).
We test for efficiency using standard tests such as return autocorrelations, runs tests, augmented Dickey-Fuller test, variance bounds test and flexible GARCH models.
Our initial, preliminary results indicate pricing in all three frontier markets remains inefficient and predictable, though some indications exist that these markets have become more informationaly efficient.