On equity market inefficiency during the COVID-19 pandemic

Robert Navratil, Stephen Taylor and Jan Vecer

International Review of Financial Analysis, 2021, vol. 77, issue C

Abstract: We show that during the weeks following the initiation of the COVID-19 pandemic, the United States equity market was inefficient. This is demonstrated by showing that utility maximizing agents over the time period ranging from mid-February to late March 2020 can generate statistically significant profits by utilizing only historical price and virus related data to forecast future equity ETF returns. We generalize Merton’s optimal portfolio problem using a novel method based upon a likelihood ratio in order to construct a dynamic trading strategy for utility maximizing agents. These strategies are shown to have statistically significant profitability and strong risk and performance statistics during the COVID-19 time-frame.

Keywords: Utility maximization; Merton’s optimal portfolio; Efficient market hypothesis (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:77:y:2021:i:c:s105752192100154x

DOI: 10.1016/j.irfa.2021.101820

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