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Efficiency of the financial markets during the COVID-19 crisis: Time-varying parameters of fractional stable dynamics

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  • Ammy-Driss, Ayoub
  • Garcin, Matthieu

Abstract

This paper investigates the impact of COVID-19 on financial markets. It focuses on the evolution of the market efficiency, using two efficiency indicators: the Hurst exponent and the memory parameter of a fractional Lévy-stable motion. The second approach combines, in the same model of dynamic, an alpha-stable distribution and a dependence structure between price returns. We provide a dynamic estimation method for the two efficiency indicators. This method introduces a free parameter, the discount factor, which we select so as to get the best alpha-stable density forecasts for observed price returns. The application to stock indices during the COVID-19 crisis shows a strong loss of efficiency for US indices. On the opposite, Asian and Australian indices seem less affected and the inefficiency of these markets during the COVID-19 crisis is even questionable.

Suggested Citation

  • Ammy-Driss, Ayoub & Garcin, Matthieu, 2023. "Efficiency of the financial markets during the COVID-19 crisis: Time-varying parameters of fractional stable dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 609(C).
    • Handle: RePEc:eee:phsmap:v:609:y:2023:i:c:s0378437122008937
    DOI: 10.1016/j.physa.2022.128335
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    1. Xavier Brouty & Matthieu Garcin, 2023. "Fractal properties, information theory, and market efficiency," Papers 2306.13371, arXiv.org.
    2. Matthieu Garcin, 2023. "Complexity measure, kernel density estimation, bandwidth selection, and the efficient market hypothesis," Papers 2305.13123, arXiv.org.

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