What is market efficiency?5 answersMarket efficiency refers to the degree to which prices in financial markets reflect all available information. It is a measure of how quickly and accurately prices adjust to new information. Efficient markets are characterized by random price movements and the absence of predictable patterns that can be exploited for consistent profits. However, studies have shown that markets may not always be efficient, leading to price anomalies. The efficiency of markets is important for companies to develop effective market policies and optimize resources. The concept of market efficiency is closely related to risk and risk aversion. While there is evidence of market efficiency, its dynamics and collective aspects are not well understood. Overall, market efficiency is a key concept in finance that influences trading strategies, the behavior of stock prices, and the effectiveness of market policies.
How can we measure market efficiency?3 answersMarket efficiency can be measured using various tools and approaches. One proposed tool is the Financial Market Efficiency Index (FMEI), which assesses and compares market efficiency based on qualitative growth and market efficiency. Another approach is to use the Shannon entropy, a tool from information theory, applied to a symbolic representation of price returns in a time series. This allows for the determination of the amount of information contained in the series and the development of a statistical test of market efficiency. The approximate entropy approach is also used to measure stock market efficiency, taking into account global, regional, and domestic economic factors. A new market efficiency measure has been developed to analyze efficiency dynamics over quantile levels, revealing differences in efficiency across different market conditions and regions. Additionally, a simple measure has been constructed to quantify market efficiency, allowing for easy comparisons across assets, time, regions, and data frequencies.
How the empirical evidence support the market efficiency?4 answersEmpirical evidence from the provided abstracts supports the market efficiency in different contexts. The study by Ahmad et al.analyzes the financial effectiveness of listed companies in the Indian stock market and concludes that efficiency is an indicator of support for investment decision-making. Elangovan et al.find that the Indian stock market is weak-form inefficient, suggesting that abnormal returns can be achieved by beating the market. Yi et al.examine the Bitcoin market and find that it satisfies the weak-form efficient market hypothesis, implying that speculators may face difficulty in exploiting profitable trading strategies. Khurram et al.conclude that there is mixed evidence regarding the market efficiency of D-8 equity markets, indicating the presence of arbitrage opportunities. Ahmed and Hossainfind that the weekly returns of selected Asian markets do not follow a random walk, suggesting the possibility of gaining arbitrage profit.
What are the main arguments against the theory of adaptive efficiency of markets?5 answersThe main arguments against the theory of adaptive efficiency of markets are that the efficient markets hypothesis (EMH) states that market prices incorporate all information rationally and instantaneously. However, proponents of behavioral finance argue that markets are not rational, but are driven by fear and greed. They believe that market efficiency is challenged by behavioral biases such as loss aversion, overconfidence, overreaction, and mental accounting. The adaptive markets hypothesis (AMH) reconciles market efficiency with behavioral alternatives by applying the principles of evolution to financial interactions. It suggests that market efficiency is related to environmental factors such as the number of competitors, profit opportunities, and adaptability of market participants. The AMH argues that these behavioral biases are consistent with an evolutionary model of individuals adapting to a changing environment via simple heuristics.
What are the criticisms of Fama and French's concept of market efficiency?5 answersFama and French's concept of market efficiency has faced criticisms in the literature. One criticism is that the assumption of constant equilibrium expected excess returns is rejected for both the French and German stock markets. Another criticism is that the French stock market exhibits periods of both efficiency and inefficiency, which coincide with major macroeconomic events. Additionally, the relationship between stock returns and Fama-French risk factors in the French stock market depends significantly on the considered time horizon. Furthermore, there is evidence that sentiment measures, such as the implied volatility index and investment advisor sentiment, have weak impacts on risk premia, but there are strong feedback effects where these sentiments are led by risk premia. Finally, factor premia have strong dynamic effects on sentiment measures, while the reverse effect is weak and only contemporaneous.
What are the implications of the Bitcoin market efficiency?5 answersThe efficiency of the Bitcoin market has several implications. Firstly, the market is found to be more inefficient compared to gold, stock, and currency markets, as it exhibits stronger long-memory features and multifractality. Secondly, Bitcoin has become more efficient over time in relation to its own events, but it is not affected by monetary policy news, indicating the absence of control on Bitcoin. Additionally, the efficiency of the Bitcoin market changes over time, with the market being more efficient during downward periods. The market also exhibits a persistent long memory phenomenon in its short-term components, suggesting possible speculation by investors. These findings are important for investors and policymakers, as they highlight the unique characteristics and behavior of the Bitcoin market, which is not influenced by traditional monetary policies and exhibits time-varying efficiency levels.