Testing the efficient market hypothesis in Latin American stock markets

We propose a novel approach to study if Latin America Stock Markets are Efficient. This test is based on a statistical arbitrage technique known as Pairs Trading, which is a relative value trading strategy consisting in taking a position in a pair of stocks that are chosen to have similar characteristics and taking a long position in one stock and a short position in the other stock. We use an approach introduced in Ramos et al. (2007) based on the evolution of the Hurst Exponent of a pair. We will show how in emerging markets this trading strategy is profitable though it is not in developed markets, which is according with the weak form of efficiency. •We propose a novel approach to test market efficiency.•This approach is based on a statistical arbitrage.•We prove that arbitrage opportunities are possible in Latin America Stock Markets.•We prove that arbitrage opportunities are not possible in Nasdaq 100.