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The Evolution of Stock Market Efficiency in the US: A Non-Bayesian Time-Varying Model Approach

Mikio Ito, Akihiko Noda () and Tatsuma Wada ()

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Abstract: A non-Bayesian time-varying model is developed by introducing the concept of the degree of market efficiency that varies over time. This model may be seen as a reflection of the idea that continuous technological progress alters the trading environment over time. With new methodologies and a new measure of the degree of market efficiency, we examine whether the US stock market evolves over time. In particular, a time-varying autoregressive (TV-AR) model is employed. Our main findings are: (i) the US stock market has evolved over time and the degree of market efficiency has cyclical fluctuations with a considerably long periodicity, from 30 to 40 years; and (ii) the US stock market has been efficient with the exception of four times in our sample period: during the long-recession of 1873-1879; the recession of 1902-1904; the New Deal era; and the recession of 1957-1958 and soon after it. It is then shown that our results are partly consistent with the view of behavioral finance.

Date: 2012-02, Revised 2015-08
New Economics Papers: this item is included in nep-cwa and nep-ets
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Published in Applied Economics 48 (2016) 621-635

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