Are European equity markets efficient? New evidence from fractal analysis

Enrico Onali and John Goddard

Papers from arXiv.org

Abstract: Fractal analysis is carried out on the stock market indices of seven European countries and the US. We find evidence of long range dependence in the log return series of the Mibtel (Italy) and the PX Glob (Czech Republic). Long range dependence implies that predictable patterns in the log returns do not dissipate quickly, and may therefore produce potential arbitrage opportunities. Therefore, these results are in contravention of the Efficient Market Hypothesis. We show that correcting for short range dependence, or prefiltering, may dispose of genuine long range dependence, suggesting that the market is efficient in cases when it is not. Prefiltering does not reduce significantly the power of the tests only for cases for which the Hurst exponent (a measure of the long range dependence) lies well outside the boundaries of no long range dependence. For borderline cases, the prefiltering procedure reduces the power of the test. On the other hand, the absence of prefiltering does not result in a test that is significantly oversized.

Date: 2014-02
New Economics Papers: this item is included in nep-fmk
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Published in International Review of Financial Analysis(2011), Vol 20, pp 59 67

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