Are European Equity Markets Efficient? New Evidence from Fractal Analysis

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 ‘pre-filtering’, may dispose of genuine long-range dependence, suggesting that the market is efficient in cases when it is not. Pre-filtering 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 pre-filtering procedure reduces the power of the test. On the other hand, the absence of pre-filtering does not result in a test that is significantly over-sized.

Keywords: market efficiency, fractal analysis, random walk hypothesis

JEL Classification: C1, G1, F3.