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A New Measure of Market Inefficiency

Author

Listed:
  • Christopher R. Stephens

    (C3-Centro de Ciencias de la Complejidad, Instituto de Ciencias Nucleares, Universidad Nacional Autónoma de México, Ciudad de México 04510, Mexico
    Instituto de Ciencias Nucleares, Universidad Nacional Autónoma de México, Ciudad de México 04510, Mexico)

  • Harald A. Benink

    (School of Economics and Management, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands
    Financial Markets Group, London School of Economics, Houghton Street, London WC2A 2AE, UK)

  • José Luís Gordillo

    (C3-Centro de Ciencias de la Complejidad, Instituto de Ciencias Nucleares, Universidad Nacional Autónoma de México, Ciudad de México 04510, Mexico)

  • Juan Pablo Pardo-Guerra

    (Department of Sociology, University of California San Diego, 9500 Gilman Dr, La Jolla, CA 92093, USA)

Abstract

Financial crises, such as the Great Financial Crisis of 2007–2009 and the COVID-19 Crisis of 2020–2021, lead to high volatility in financial markets and highlight the importance of the debate on the Efficient Markets Hypothesis, a corollary of which is that in an efficient market it should not be possible to systematically make excess returns. In this paper, we discuss a new empirical measure—Excess Trading Returns—that distinguishes between market and trading returns and that can be used to measure inefficiency. We define an Inefficiency Matrix that can provide a complete, empirical characterization of the inefficiencies inherent in a market. We illustrate its use in the context of empirical data from a pair of model markets, where information asymmetries can be clearly understood, and discuss the challenges of applying it to market data from commercial exchanges.

Suggested Citation

  • Christopher R. Stephens & Harald A. Benink & José Luís Gordillo & Juan Pablo Pardo-Guerra, 2021. "A New Measure of Market Inefficiency," JRFM, MDPI, vol. 14(6), pages 1-22, June.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:6:p:263-:d:572629
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    References listed on IDEAS

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    Cited by:

    1. Cristi Spulbar & Elena Loredana Minea, 2022. "Inefficient Stock Markets And Their Implications In The Context Of Extreme Financial Events: A Theoretical Framework," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 38-41, February.

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