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Market Development, Information Diffusion, and the Global Anomaly Puzzle

Published online by Cambridge University Press:  11 July 2022

Charlie X. Cai Open the ORCID record for Charlie X. Cai [Opens in a new window] ,
Kevin Keasey ,
Peng Li  and
Qi Zhang
Charlie X. Cai*
Affiliation:
University of Liverpool Management School
Kevin Keasey
Affiliation:
University of Leeds Leeds University Business School kk@lubs.leeds.ac.uk
Peng Li
Affiliation:
University of Leeds Leeds University Business School p.li@leeds.ac.uk
Qi Zhang
Affiliation:
Durham University Business School qi.zhang2@durham.ac.uk
*
x.cai7@liverpool.ac.uk (corresponding author)
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Abstract

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Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets; namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low-efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low-efficiency regimes provides an explanation to the puzzle.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 104 - 147
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for the constructive comments from Söhnke M. Bartram, Jennifer Conrad (the editor), John Griffin, Heiko Jacobs, Lei Jiang, Ron Kaniel, Patrick Kelly, Dong Lou, Christian Lundblad, Sebastian Müller (the referee), Jiaren Pang, Neil Pearson, Tao Shen, Zhishu Yang, and the participants of the 2018 INQUIRE UK Business School Seminar, the 2016 Research in Behavioral Finance Conference, the 2019 SYSBS Finance International Conference Joint with Geneva Finance Research Institute, and seminars in Tsinghua University, the University of Leeds, and the University of Liverpool. Errors are ours.

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