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Identifying periods of market inefficiency for return predictability

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  • Subrata Kumar Mitra
  • Manojit Chattopadhyay
  • Parikshit Charan
  • Jaslene Bawa

Abstract

The article examines the efficiency of 31 stock index series spanning 26 countries across the world, using generalized spectral test (GST) and detects departure from the martingale difference hypothesis (MDH). A moving window of 24 months was used and p-values of GST were estimated. In order to explore whether the departure from market efficiency can be used for generating profitable trades, an exponentially weighted-moving-average-based trading rule was applied and was found that average profits per trade were significantly higher when p-value of the GST was less than 0.1. These observations are in consistent with the adapted market hypothesis.

Suggested Citation

  • Subrata Kumar Mitra & Manojit Chattopadhyay & Parikshit Charan & Jaslene Bawa, 2017. "Identifying periods of market inefficiency for return predictability," Applied Economics Letters, Taylor & Francis Journals, vol. 24(10), pages 668-671, June.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:10:p:668-671
    DOI: 10.1080/13504851.2016.1218424
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    Cited by:

    1. Day, Min-Yuh & Ni, Yensen & Huang, Paoyu, 2019. "Trading as sharp movements in oil prices and technical trading signals emitted with big data concerns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 349-372.
    2. Sergio Bianchi & Massimiliano Frezza, 2018. "Liquidity, Efficiency and the 2007-2008 Global Financial Crisis," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 375-404, November.
    3. Hill, Jonathan B. & Motegi, Kaiji, 2019. "Testing the white noise hypothesis of stock returns," Economic Modelling, Elsevier, vol. 76(C), pages 231-242.
    4. Tiwari, Aviral Kumar & Aye, Goodness C. & Gupta, Rangan, 2019. "Stock market efficiency analysis using long spans of Data: A multifractal detrended fluctuation approach," Finance Research Letters, Elsevier, vol. 28(C), pages 398-411.

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