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Are European equity markets efficient? New evidence from fractal analysis

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  • Enrico Onali
  • John Goddard

Abstract

Fractal analysis is carried out on the stock market indices of seven European countries and the US. We find evidence of long range dependence in the log return series of the Mibtel (Italy) and the PX Glob (Czech Republic). Long range dependence implies that predictable patterns in the log returns do not dissipate quickly, and may therefore produce potential arbitrage opportunities. Therefore, these results are in contravention of the Efficient Market Hypothesis. We show that correcting for short range dependence, or prefiltering, may dispose of genuine long range dependence, suggesting that the market is efficient in cases when it is not. Prefiltering does not reduce significantly the power of the tests only for cases for which the Hurst exponent (a measure of the long range dependence) lies well outside the boundaries of no long range dependence. For borderline cases, the prefiltering procedure reduces the power of the test. On the other hand, the absence of prefiltering does not result in a test that is significantly oversized.

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Paper provided by arXiv.org in its series Papers with number 1402.1440.

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Date of creation: Feb 2014
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Publication status: Published in International Review of Financial Analysis(2011), Vol 20, pp 59 67
Handle: RePEc:arx:papers:1402.1440

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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Ladislav Kristoufek, 2012. "How are rescaled range analyses affected by different memory and distributional properties? A Monte Carlo study," Papers 1201.3511, arXiv.org.
  4. 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.
  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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