Market Efficiency in G-20 Countries: The Paradox of Financial Crisis
Annals of Financial Economics ( Print- ISSN: 2010-4952, online ISSN: 2010-4960) Vol. 8 No. 1 ( June 2013) pg 1-27
27 Pages Posted: 7 Nov 2014
Date Written: June 28, 2013
This paper is amongst the first to investigate weak-form efficiency of the most developed (G-20) countries in the world. It also measures the impact of the 2007 financial crisis on the stock markets of these countries, in terms of their efficiency. Serial correlation test, ADF unit root test, Lo and MacKinlay (1988) variance ratio test, Chow and Denning (1993) RWH test and Wrights’ 2000 ranks and signs based multiple variance ratio test were utilized to carry out this analysis. The entire study period was divided into a pre-crisis period (January 1, 2005 – August 8, 2007) and a during crisis period (August 9, 2007 – December 31, 2011). Strong contemporaneous effects emerged across all international markets (except Saudi Arabia) as a consequence of the 2007 crisis. This may be due to increased international intra-day activity across the world markets. It was concluded that the "Samuelson dictum," which states that "while individual stocks are efficient, the market index is inefficient," seems to hold good on a global level by analogy. This is evident on the premise that, on the whole the 2007 crisis reduced return and increased volatility, even though individual markets became more efficient. The most robust result from the analysis is that most of the individual markets are weak-form efficient. Following the crisis of 2007, the methodology used indicates that on the whole, the market efficiency of individual stock markets improved.
Hence, during the pre-crisis, volatility was low but heteroskedastic. However, during the period of the crisis, volatility was high but homoscedastic. The heightened volatility and low return that are a consequence of the crisis coupled with improved market efficiency, due to market vigil and control, ensure that abnormal returns and persistent arbitrage possibilities are wiped out. This appears to be a paradox of a crisis.
Keywords: Market efficiency; Market efficiency, G-20, financial crises, during crisis,Samuelson dictum, heteroskedastic, homoscedastic
JEL Classification: G12, G14, G15, F36
Suggested Citation: Suggested Citation