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Are European equity markets efficient? New evidence from fractal analysis

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  • Onali, Enrico
  • Goddard, John

Abstract

We report an empirical analysis of long-range dependence in the returns of eight stock market indices, using the Rescaled Range Analysis (RRA) to estimate the Hurst exponent. Monte Carlo and bootstrap simulations are used to construct critical values for the null hypothesis of no long-range dependence. The issue of disentangling short-range and long-range dependence is examined. Pre-filtering by fitting a (short-range) autoregressive model eliminates part of the long-range dependence when the latter is present, while failure to pre-filter leaves open the possibility of conflating short-range and long-range dependence. There is a strong evidence of long-range dependence for the small central European Czech stock market index PX-glob, and a weaker evidence for two smaller western European stock market indices, MSE (Spain) and SWX (Switzerland). There is little or no evidence of long-range dependence for the other five indices, including those with the largest capitalizations among those considered, DJIA (US) and FTSE350 (UK). These results are generally consistent with prior expectations concerning the relative efficiency of the stock markets examined.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 20 (2011)
Issue (Month): 2 (April)
Pages: 59-67

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Handle: RePEc:eee:finana:v:20:y:2011:i:2:p:59-67

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Web page: http://www.elsevier.com/locate/inca/620166

Related research

Keywords: Market efficiency Fractal analysis Random walk hypothesis;

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References

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Citations

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Cited by:
  1. Ladislav Kristoufek, 2012. "Fractal Markets Hypothesis And The Global Financial Crisis: Scaling, Investment Horizons And Liquidity," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(06), pages 1250065-1-1.
  2. Kristoufek, Ladislav, 2012. "How are rescaled range analyses affected by different memory and distributional properties? A Monte Carlo study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(17), pages 4252-4260.
  3. Kedong YIN & Hengda ZHANG & Wenbo ZHANG & Qian WEI, 2013. "Fractal Analysis of the Gold Market in China," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 144-163, October.
  4. A. Sensoy & Benjamin Miranda Tabak, 2013. "How much random does European Union walk? A time-varying long memory analysis," Working Papers Series 342, Central Bank of Brazil, Research Department.
  5. Adelina Gschwandtner & Michael Hauser, 2013. "Profit Persistence and Stock Returns," Studies in Economics 1320, Department of Economics, University of Kent.

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