Are capital markets turning efficient? Need for financial market efficiency index

Ruchi Arora and Rishi Mehra
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Ruchi Arora: Department of Finance, Birla Institute of Management Technology, Uttar Pradesh, India2Department of Finance, Arun Jaitely National Institute of Financial Markets, Faridabad, India
Rishi Mehra: Department of Finance, Birla Institute of Management Technology, Uttar Pradesh, India2Department of Finance, Arun Jaitely National Institute of Financial Markets, Faridabad, India

International Journal of Financial Engineering (IJFE), 2023, vol. 10, issue 01, 1-28

Abstract: Government, regulators, exchanges, banks, and institutions collaborate to develop rules and devote significant time and resources to improving the financial system, with the ultimate goal of creating a more effective market. The statistics on turnover and earnings only show the market’s Quantitative’ growth. The figures do not demonstrate how the market has improved in terms of Quality and Market Efficiency. A robust market structure and long-term growth in any market are only possible when development is based on both qualitative (market efficiency) and quantitative factors (Turnovers and Earnings). Historically, studies and research have laid great emphasis on determining the market’s level of efficiency. However, market efficiency was always checked using staggered time frames and efficiency tests. The need of the hour is a transparent and simple-to-understand tool that can continuously measure market efficiency and has universal applicability. This study proposes a tool for measuring efficiency called the Financial Market Efficiency Index — FMEI. The Index would derive its parameters from the broad market Index of any country to assess and compare market efficiency. The index would not only measure the qualitative growth (Market Efficiency) of any market, but it would also compare the market efficiency of all countries around the world. This would allow stakeholders to make the best decisions for their respective markets.

Keywords: Market efficiency; EMH; random walk; market index (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2424786322500281

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