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Testing the Efficiency of the GIPS Sovereign Debt Markets using an Asymmetrical Volatility Test

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  • Christian Rudolf RICHTER

    (German University in Cairo, Faculty of Management Technology, New Cairo City, Egypt.)

  • Bachar FAKHRY

    (University of Bedfordshire, Business School, UK.)

Abstract

The efficient market hypothesis has been around since 1962, the theory is based on a simple rule, namely that the price of any asset must fully reflect all available information.Yet there is empirical evidence financial markets are too volatile to be efficient. The empirical evidence suggests that the reaction to events is the crucial factor, rather than the actual information. Generally, market participants react differently to negative and positive market shocks, hinting at asymmetrical effects. This paperanalyses the impact of asymmetrical effects on the efficiency of the financial market during the recent crises. We test the efficiency of the financial markets using the daily prices of the GIPS sovereign debts between June 2007 and December 2011. This allowed us to test the efficiency during the financial crisis and sovereign debt crisis periods. We used a GJR-GARCH based variance bound test based on the test derived by Fakhry & Richter (2015). Our tests provide evidence forfinancial markets being too volatile to be efficient. At the same time, the results are pointing towards bounded rationality rather than irrationality.

Suggested Citation

  • Christian Rudolf RICHTER & Bachar FAKHRY, 2016. "Testing the Efficiency of the GIPS Sovereign Debt Markets using an Asymmetrical Volatility Test," Journal of Economics and Political Economy, KSP Journals, vol. 3(3), pages 524-535, September.
    • Handle: RePEc:ksp:journ1:v:3:y:2016:i:3:p:524-535
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    References listed on IDEAS

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    Cited by:

    1. Saker Sabkha & Christian Peretti & Dorra Hmaied, 2019. "On the informational market efficiency of the worldwide sovereign credit default swaps," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 581-608, December.
    2. Bachar Fakhry & Christian Richter, 2018. "Does the Federal Constitutional Court Ruling Mean the German Financial Market is Efficient?," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 4(2), pages 111-125.

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    More about this item

    Keywords

    Efficient market hypothesis; Volatility tests; Asymmetrical effect; GJR-GARCH; Sovereign debt market; Crises.;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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