3 underpinnings are more conducive to a better informational environment in stock markets. This in turn serves as the basis for the policy framework and recommendations. As noted, our focus is on East Asia. To that end, we discuss in deeper detail the key institutional characteristics of their stock markets, the specific issues that affect them, and the policies that could further enhance the efficiency of these markets.

# **2.  Literature survey**

There is an abundant literature on the informational efficiency of the US stock markets<sup>1</sup> . This literature, starting with Samuelson (1965) and made famous by Fama (1970), takes advantage of the rich supply of detailed data for the US markets to test for a lack of return predictability –an implication of efficiency. Depending of the conditioning informational set used to predict returns, one is able to test for strong, semi-strong, or weak efficiency as defined in the theoretical finance literature<sup>2</sup> . As we mentioned before, our focus is not to test formally for efficiency as defined in this literature, but rather to study the determinants of positive attributes correlated with efficient markets, such as liquidity, low transaction costs, and a good informational environment. As such this paper is more closely related to recent cross-country studies of the determinants of positive stock market outcomes.

In cross-country studies of stock market development most authors have used market capitalization as a summary measure of the quality of markets. However, as mentioned before, the size of a market –as measured by market capitalization—is a distinct characteristic from its efficiency. Large markets may not be liquid or may not function efficiently. A large market capitalization may represent only a few firms and can be affected by rapid price changes. Furthermore, its calculation may vary across markets, depending on the use of the float or total shares outstanding (float plus restricted shares).

Some cross-country studies, such as La Porta et al (2005) and De la Torre and Schmukler (2005), attempt to use an outcome variable more related to efficiency to complement market capitalization. La Porta et al (2005) in one of their specifications use value traded as one of a set of stock market outcomes. Their focus is to study what particular specifications of securities markets laws matter for market development. They group those characteristics broadly into those related to “private monitoring” and those that depend on “public enforcement” of the law. They find that markets with more private monitoring are more efficient –as proxied by value traded— than those that rely on the public enforcement of the law.

On a study that focuses on the development of capital markets in Latin America, De la Torre and Schmukler (2004) present cross-country panel regressions on the

> 1 See Fama’s (1970 and 1991) survey articles and Schwert (2003) for overviews of the paths that the literature has followed in testing for market efficiency.

> 2 In the theoretical finance literature, a market is weakly-efficient if it reflects all available _past_ information.  Semistrong form efficiency occurs when prices reflect all available _public_ information, and strong form efficiency is when prices reflect all available _public and private_ information.  Researchers disagree on the actual level of efficiency of mature markets.