Analyzing the financial Markets pulse: Efficiency, Asset Pricing, and Behavioral Insights in Developed and Emerging Economies

Abstract

This study provides a detailed and thorough empirical investigation to gauge the the efficiency of 'financial markets' and investigate the ability of effective assessment of widely used 'advanced asset pricing models' in diverse economic contexts at developed and emerging world. Using relevant panel data techniques, over the period of 2000–2023, the study employ a robust econometric framework which integrates traditional factor-based models—including the Fama-French five-factor model—with the macroeconomic fundamentals of GDP growth and inflation. Further, utilizing CS-ARDL estimation, stationarity tests, and market efficiency diagnostics (variance ratio and autocorrelation tests), the study identifies substantial differences in market behavior and pricing efficiency between diverse economies. The findings indicate that developed markets exhibit limited efficiency, but developing markets consistently demonstrate inefficiency in managing non-random price changes - the advantages of scale and value are more pronounced in emerging markets. The research further emphasize stable correlations between asset returns and macroeconomic indicators, revealing that the dynamics of the real sector significantly influence asset pricing. The research requires business strategies customized for each scenario and pricing models that include both economic and financial variables. These results are beneficial for policymakers, investors, and academics aiming to enhance the safety, transparency, and efficiency of financial markets in an increasingly interconnected global economy.