An Empirical Analysis on the Efficiency of the Microfinance Investment Market

This paper empirically analyzes the market efficiency of microfinance investment funds (MIVs).

MIVs have grown in number and scale in the past decade. The paper uses an index of MIVs and applies two kinds of variance ratio tests to examine whether this index follows a random walk. The study uses the sample period from December 2003 to June 2010 as well as two sub samples, which divide the entire period before and after January 2007. Empirical evidence demonstrates that MIV index does not:

• Follow a random walk, suggesting that the MIV market is not efficient;
• Satisfy efficient market hypothesis.

The paper states that this result is not affected by changes in either empirical techniques or sample periods. It attributes market inefficiency of MIVs to market concentration. The paper recommends that MFIs should be encouraged to increase transparency in their financial and social performance. Creation of an enabling environment in which global investors can invest more in small and medium-scale MFIs will reduce market concentration and improve market efficiency.