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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

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.

Suggested Citation

  • Reboredo, Juan C. & Rivera-Castro, Miguel A. & Miranda, José G.V. & García-Rubio, Raquel, 2013. "How fast do stock prices adjust to market efficiency? Evidence from a detrended fluctuation analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(7), pages 1631-1637.
  • Handle: RePEc:eee:phsmap:v:392:y:2013:i:7:p:1631-1637
    DOI: 10.1016/j.physa.2012.11.038
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    References listed on IDEAS

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    1. repec:eee:riibaf:v:42:y:2017:i:c:p:544-558 is not listed on IDEAS
    2. Roy Cerqueti & Giulia Rotundo, 2015. "A review of aggregation techniques for agent-based models: understanding the presence of long-term memory," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(4), pages 1693-1717, July.
    3. repec:eee:phsmap:v:486:y:2017:i:c:p:183-191 is not listed on IDEAS
    4. Hiremath, Gourishankar S. & Narayan, Seema, 2016. "Testing the adaptive market hypothesis and its determinants for the Indian stock markets," Finance Research Letters, Elsevier, vol. 19(C), pages 173-180.

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