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Efficiency of the financial markets during the COVID-19 crisis: Time-varying parameters of fractional stable dynamics

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  • Ammy-Driss, Ayoub
  • Garcin, Matthieu

Abstract

This paper investigates the impact of COVID-19 on financial markets. It focuses on the evolution of the market efficiency, using two efficiency indicators: the Hurst exponent and the memory parameter of a fractional Lévy-stable motion. The second approach combines, in the same model of dynamic, an alpha-stable distribution and a dependence structure between price returns. We provide a dynamic estimation method for the two efficiency indicators. This method introduces a free parameter, the discount factor, which we select so as to get the best alpha-stable density forecasts for observed price returns. The application to stock indices during the COVID-19 crisis shows a strong loss of efficiency for US indices. On the opposite, Asian and Australian indices seem less affected and the inefficiency of these markets during the COVID-19 crisis is even questionable.

Suggested Citation

  • Ammy-Driss, Ayoub & Garcin, Matthieu, 2023. "Efficiency of the financial markets during the COVID-19 crisis: Time-varying parameters of fractional stable dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 609(C).
    • Handle: RePEc:eee:phsmap:v:609:y:2023:i:c:s0378437122008937
    DOI: 10.1016/j.physa.2022.128335
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    Cited by:

    1. Matthieu Garcin, 2023. "Complexity measure, kernel density estimation, bandwidth selection, and the efficient market hypothesis," Papers 2305.13123, arXiv.org.
    2. Xavier Brouty & Matthieu Garcin, 2023. "Fractal properties, information theory, and market efficiency," Papers 2306.13371, arXiv.org.
    3. Palomba, Giulio & Tedeschi, Marco, 2024. "Contagion among European financial indices, evidence from a quantile VAR approach," Economic Systems, Elsevier, vol. 48(2).
    4. Brouty, Xavier & Garcin, Matthieu, 2024. "Fractal properties, information theory, and market efficiency," Chaos, Solitons & Fractals, Elsevier, vol. 180(C).

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