How to Measure Financial Market Efficiency? A Multifractality-Based Quantitative Approach with an Application to the European Carbon Market

Cristina Sattarhoff and Marc Gronwald

No 7102, CESifo Working Paper Series from CESifo

Abstract: This paper proposes a new measure for the evaluation of financial market efficiency, the so-called intermittency coefficient. This is a multifractality measure that can quantify the deviation from a random walk within the framework of the multifractal random walk model by Bacry et al. (2001b). While the random walk corresponds to the most genuine form of market efficiency, the larger the value of the intermittency coefficient is, the more inefficient a market would be. In contrast to commonly used methods based on Hurst exponents, the intermittency coefficient is a more powerful tool due to its well-established inference apparatus based on the generalised method of moments estimation technique. In an empirical application using data from the largest currently existing market for tradable pollution permits, the European Union Emissions Trading Scheme, we show that this market becomes more efficient over time. In addition, the degree of market efficiency is overall similar to that for the US stock market; for one sub-period, the market efficiency is found to be higher. While the first finding is anticipated, the second finding is noteworthy, as various observers expressed concerns with regard to the information efficiency of this newly established artificial market.

Keywords: market efficiency; multifractality; multifractal random walk; European Union Emissions Trading Scheme (search for similar items in EconPapers)
JEL-codes: C53 C58 G14 Q02 Q54 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ene, nep-env, nep-fmk and nep-knm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp7102.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7102

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().