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How fast do stock prices adjust to market efficiency? Evidence from a detrended fluctuation analysis

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  • Reboredo, Juan C.
  • Rivera-Castro, Miguel A.
  • Miranda, José G.V.
  • García-Rubio, Raquel
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    Abstract

    In this paper we analyse price fluctuations with the aim of measuring how long the market takes to adjust prices to weak-form efficiency, i.e., how long it takes for prices to adjust to a fractional Brownian motion with a Hurst exponent of 0.5. The Hurst exponent is estimated for different time horizons using detrended fluctuation analysis–a method suitable for non-stationary series with trends–in order to identify at which time scale the Hurst exponent is consistent with the efficient market hypothesis. Using high-frequency share price, exchange rate and stock data, we show how price dynamics exhibited important deviations from efficiency for time periods of up to 15 min; thereafter, price dynamics was consistent with a geometric Brownian motion. The intraday behaviour of the series also indicated that price dynamics at trade opening and close was hardly consistent with efficiency, which would enable investors to exploit price deviations from fundamental values. This result is consistent with intraday volume, volatility and transaction time duration patterns.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 392 (2013)
    Issue (Month): 7 ()
    Pages: 1631-1637

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    Handle: RePEc:eee:phsmap:v:392:y:2013:i:7:p:1631-1637

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Finance; Market efficiency; Speed of adjustment; Detrended fluctuation analysis;

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