Are European equity markets efficient? New evidence from fractal analysis

Enrico Onali*, John Goddard

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

We report an empirical analysis of long-range dependence in the returns of eight stock market indices, using the Rescaled Range Analysis (RRA) to estimate the Hurst exponent. Monte Carlo and bootstrap simulations are used to construct critical values for the null hypothesis of no long-range dependence. The issue of disentangling short-range and long-range dependence is examined. Pre-filtering by fitting a (short-range) autoregressive model eliminates part of the long-range dependence when the latter is present, while failure to pre-filter leaves open the possibility of conflating short-range and long-range dependence. There is a strong evidence of long-range dependence for the small central European Czech stock market index PX-glob, and a weaker evidence for two smaller western European stock market indices, MSE (Spain) and SWX (Switzerland). There is little or no evidence of long-range dependence for the other five indices, including those with the largest capitalizations among those considered, DJIA (US) and FTSE350 (UK). These results are generally consistent with prior expectations concerning the relative efficiency of the stock markets examined.

Original languageEnglish
Pages (from-to)59-67
Number of pages9
JournalInternational Review of Financial Analysis
Volume20
Issue number2
Early online date21 Feb 2011
DOIs
Publication statusPublished - Apr 2011

Fingerprint

Fractal
Long-range dependence
Equity markets
Stock market index
Filter
Simulation
Empirical analysis
Stock market
Capitalization
Rescaled range
Autoregressive model
Switzerland
Spain
Hurst exponent
Relative efficiency
Critical value
European stock markets
Bootstrap

Bibliographical note

© 2011, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

  • fractal analysis
  • market efficiency
  • random walk hypothesis

Cite this

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Are European equity markets efficient? New evidence from fractal analysis. / Onali, Enrico; Goddard, John.

In: International Review of Financial Analysis, Vol. 20, No. 2, 04.2011, p. 59-67.

Research output: Contribution to journalArticle

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