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A Non-linear Dependency Test for Market Efficiency: Evidence from International Stock Markets

Author

Listed:
  • Samuel Tabot ENOW

    (The Independent Institute of Education Vega School)

Abstract

One of the on-going difficulties for finance practitioners is to out rightly prove or disapprove the concept of market efficiency because the constituents of the concept do not always reflect real financial markets. Market efficiency is an idle state that varies with time and may have dire consequences for active market participants. The aim of this study was to empirically investigate market efficiency before, during and after a period of financial distress. A BDSL non-linear dependency test was used to observe the logic distance between the observed pairs of returns and the expected pair vectors in stock prices for the JSE, Nasdaq, CAC 40, DAX, Nikkei 225 and BIST100. The findings revealed that market efficiency is a dynamic concept. Most financial markets under consideration show strong signs of efficiencies before and after financial distress. However, significant inefficiencies were observed during a bearish period probably due to fear and greed. Considering the dynamic nature of market efficiency, market participants may enhance the value of their portfolios by alternating their investment style accordingly. More specifically, investors should consider investing in index fund EFTs during periods of financial distress and adopt an active management strategy during bullish periods. Also, scarce liquidity seems to be the major cause of market inefficiency during periods of financial distress therefore, quantitative easing is strongly recommended during these episodes.

Suggested Citation

  • Samuel Tabot ENOW, 2023. "A Non-linear Dependency Test for Market Efficiency: Evidence from International Stock Markets," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 7(1), pages 1-12.
    • Handle: RePEc:trp:01jefa:jefa0061
    DOI: 10.1991/jefa.v7i1.a56
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    References listed on IDEAS

    as
    1. Samuel Tabot Enow, 2021. "The Impact of Covid-19 on Market Efficiency: A Comparative Market Analysis," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 9(4), pages 235-244.
    2. Genest, Christian & Ghoudi, Kilani & Remillard, Bruno, 2007. "Rank-Based Extensions of the Brock, Dechert, and Scheinkman Test," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 1363-1376, December.
    3. Lars Tegtmeier, 2021. "Testing the Efficiency of Globally Listed Private Equity Markets," JRFM, MDPI, vol. 14(7), pages 1-16, July.
    4. Samuel Tabot Enow, 2022. "Overreaction And Underreaction During The Covid-19 Pandemic In The South African Stock Market And Its Implications," Eurasian Journal of Business and Management, Eurasian Publications, vol. 10(1), pages 19-26.
    5. Kent Daniel & David Hirshleifer, 2015. "Overconfident Investors, Predictable Returns, and Excessive Trading," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 61-88, Fall.
    6. Bryan D. MacGregor & Rainer Schulz & Yuan Zhao, 2021. "Performance and Market Maturity in Mutual Funds: Is Real Estate Different?," The Journal of Real Estate Finance and Economics, Springer, vol. 63(3), pages 437-492, October.
    7. Lucian A. Bebchuk & Alon Brav & Wei Jiang, 2015. "The Long-Term Effects of Hedge Fund Activism," NBER Working Papers 21227, National Bureau of Economic Research, Inc.
    8. Subhamitra Patra & Gourishankar S. Hiremath, 2022. "An Entropy Approach to Measure the Dynamic Stock Market Efficiency," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(2), pages 337-377, June.
    9. Samuel Tabot ENOW, 2022. "Evidence of Adaptive Market Hypothesis in International Financial Markets," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 13(2), pages 48-55, December.
    10. Elroy Dimson & Massoud Mussavian, 1998. "A brief history of market efficiency," European Financial Management, European Financial Management Association, vol. 4(1), pages 91-103.
    11. Ali Fayyaz Munir & Mohd Edil Abd. Sukor & Shahrin Saaid Shaharuddin, 2022. "Adaptive Market Hypothesis and Time-varying Contrarian Effect: Evidence From Emerging Stock Markets of South Asia," SAGE Open, , vol. 12(1), pages 21582440211, January.
    12. Samuel Tabot Enow, 2022. "Price Clustering in International Financial Markets during the COVID-19 Pandemic and Its Implications," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 10(2), pages 46-53.
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    More about this item

    Keywords

    Market Efficiency; Abnormal Returns; Stock Markets; Active Management; BDSL Test; Non-Linear Dependence.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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