Identifying periods of market inefficiency for return predictability

Subrata Kumar Mitra, Manojit Chattopadhyay, Parikshit Charan and Jaslene Bawa

Applied Economics Letters, 2017, vol. 24, issue 10, 668-671

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.

Date: 2017
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DOI: 10.1080/13504851.2016.1218424

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