Stock Price Synchronicities in Emerging Markets

Abstract

This study examines the intra-market stock price synchronicities of emerging markets and attempts to explain the phenomenon in terms of factors that characterize the market structure, the market's speculative trading behavior, and the degree of integration with the world market. Panel data are collected and computed for synchronicities and relevant measures. Our results suggest that firm-specific information, in comparison to market-level information, becomes less significant in terms of pricing stocks as the holding period is extended, perhaps due to lagged spillover effects among stocks, a pattern that is particularly evident in those markets experiencing high price synchronicities. It is also found that the hypothesis supported in previous studies that low-income economies experience higher price synchronicities no longer holds within the spectrum of emerging markets. Instead, stronger speculative behavior and a lower degree of integration with the world market lead to greater stock price synchronicity in a market. These results are consistent with the hypotheses that firm-level fundamentals are difficult to price in a speculative market where noise trades prevail and that a more segmented market attaches more weight to local-market-specific information relative to global information in terms of pricing. Finally, the stock price synchronicity in many markets varies asymmetrically with negative market conditions, suggesting that firm-level fundamentals become more difficult to be capitalized into stock prices when markets are bearish.