Journal of Economics and Financial Analysis, 7 (1), pp. 1-12, [2023]
URI: https://ojs.tripaledu.com/jefa/article/view/79/90

A Non-linear Dependency Test for Market Efficiency: Evidence from International Stock Markets


IIE Varsity College, South Africa


DOI: http://dx.doi.org/10.1991/jefa.v7i1.a56

Abstract

One of the on-going difficulties for finance practitioners is to out rightly prove or disapprove the concept of market efficiency because the constituents of the concept do not always reflect real financial markets. Market efficiency is an idle state that varies with time and may have dire consequences for active market participants. The aim of this study was to empirically investigate market efficiency before, during and after a period of financial distress. A BDSL non-linear dependency test was used to observe the logic distance between the observed pairs of returns and the expected pair vectors in stock prices for the JSE, Nasdaq, CAC 40, DAX, Nikkei 225 and BIST100. The findings revealed that market efficiency is a dynamic concept. Most financial markets under consideration show strong signs of efficiencies before and after financial distress. However, significant inefficiencies were observed during a bearish period probably due to fear and greed. Considering the dynamic nature of market efficiency, market participants may enhance the value of their portfolios by alternating their investment style accordingly. More specifically, investors should consider investing in index fund EFTs during periods of financial distress and adopt an active management strategy during bullish periods. Also, scarce liquidity seems to be the major cause of market inefficiency during periods of financial distress therefore, quantitative easing is strongly recommended during these episodes.

Keywords

Market Efficiency; Abnormal Returns; Stock Markets; Active Management; BDSL Test; Non-Linear Dependence.

JEL Classification

G11, G15, G17.

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