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Random walks and market efficiency tests: evidence on US, Chinese and European capital markets within the context of the global Covid-19 pandemic

Author

Listed:
  • Rui Dias

    (Polytechnic Institute of Setubal, Portugal)

  • Nuno Teixeira

    (Polytechnic Institute of Setubal, Portugal)

  • Veronika Machova

    (Institute of Technology and Business, Czech Republic)

  • Pedro Pardal

    (Polytechnic Institute of Setubal, Portugal)

  • Jakub Horak

    (Institute of Technology and Business, Czech Republic)

  • Marek Vochozka

    (Institute of Technology and Business, Czech Republic)

Abstract

Research background: Covid-19 has affected the global economy and has had an inevitable impact on capital markets. In the week of February 24–28, 2020, stock markets crashed. The index FTSE 100 decreased 13%, while the indices DJIA and S&P 500 fell 11–12%, the biggest drop since the 2007–2008 financial and economic crisis. It is therefore of interest to test the random walk hypothesis in developed capital markets, European and also non-European, in order to understand the different predictabilities between them. Purpose of the article: The aim is to analyze capital market efficiency, in its weak form, through the stock market indices of Belgium (index BEL 20), France (index CAC 40), Germany (index DAX 30), USA (index DOW JONES), Greece (index FTSE Athex 20), Spain (index IBEX 35), Ireland (index ISEQ), Portugal (index PSI 20) and China (index SSE) for the period from December 2019 to May 2020. Methods: Panel unit root tests of Breitung (2000), Levin et al. (2002) and Hadri (2002) were used to assess the time series stationarity. The test of Clemente et al. (1998) is used to detect structural breaks. The tests for the random walk hypothesis follows the variance ratio methodology proposed by Lo and MacKinlay (1988). Findings & Value added: In general, we found mixed confirmation about the EMH (efficient market hypothesis). Taking into account the conclusions of the rank variance test, the random walk hypothesis was rejected in the case of stock indices: Dow Jones, SSE and PSI 20, partially rejected in the case indices: BEL 20, CAC 40, FTSTE Athex 20 and DEX 30, but accepted for indices: IBEX 35 and ISEQ. The results also show that prices do not fully reflect the information available and that changes in prices are not independent and identically distributed. This situation has consequences for investors, since some returns can be expected, creating opportunities for arbitrage and for abnormal returns, contrary to the assumptions of random walk and information efficiency.

Suggested Citation

  • Rui Dias & Nuno Teixeira & Veronika Machova & Pedro Pardal & Jakub Horak & Marek Vochozka, 2020. "Random walks and market efficiency tests: evidence on US, Chinese and European capital markets within the context of the global Covid-19 pandemic," Oeconomia Copernicana, Institute of Economic Research, vol. 11(4), pages 585-608, December.
    • Handle: RePEc:pes:ieroec:v:11:y:2020:i:4:p:585-608
    DOI: 10.24136/oc.2020.024
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    Cited by:

    1. Beata Bieszk-Stolorz & Iwona Markowicz, 2021. "Risk of Decline in Share Prices of Energy and Fuel Sector on the Warsaw Stock Exchange During the Two Waves of the COVID-19 Pandemic," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 977-996.
    2. Marcin Bogdański, 2021. "Employment Diversification as a Determinant of Economic Resilience and Sustainability in Provincial Cities," Sustainability, MDPI, vol. 13(9), pages 1-13, April.
    3. Jimei Shen & Zhehu Yuan & Yifan Jin, 2022. "AlphaMLDigger: A Novel Machine Learning Solution to Explore Excess Return on Investment," Papers 2206.11072, arXiv.org, revised Dec 2022.
    4. Brzeszczyński, Janusz & Gajdka, Jerzy & Pietraszewski, Piotr & Schabek, Tomasz, 2022. "Has the risk of socially responsible investments (SRI) companies stocks changed in the COVID-19 period? International evidence," Finance Research Letters, Elsevier, vol. 49(C).
    5. Beata Bieszk-Stolorz & Iwona Markowicz, 2022. "Changes in Share Prices of Macrosector Companies on the Warsaw Stock Exchange as a Reaction to the COVID-19 Pandemic," Sustainability, MDPI, vol. 14(16), pages 1-18, August.
    6. Michal Bernardelli & Zbigniew Korzeb & Pawel Niedziolka, 2021. "The banking sector as the absorber of the COVID-19 crisis’ economic consequences: perception of WSE investors," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 335-374, June.
    7. Tomas Kliestik & Alena Novak Sedlackova & Martin Bugaj & Andrej Novak, 2022. "Stability of profits and earnings management in the transport sector of Visegrad countries," Oeconomia Copernicana, Institute of Economic Research, vol. 13(2), pages 475-509, June.
    8. Michał Bernard Pietrzak & Bartłomiej Igliński & Wojciech Kujawski & Paweł Iwański, 2021. "Energy Transition in Poland—Assessment of the Renewable Energy Sector," Energies, MDPI, vol. 14(8), pages 1-23, April.
    9. Beata Bieszk-Stolorz & Iwona Markowicz, 2021. "Decline in Share Prices of Energy and Fuel Companies on the Warsaw Stock Exchange as a Reaction to the COVID-19 Pandemic," Energies, MDPI, vol. 14(17), pages 1-17, August.
    10. Daouda Lawa Tan Toe & Mamadou Toe & Tibi Didier Zoungrana, 2023. "Investigating the weak and semi-strong forms of Informational Efficiency on the West African Economic and Monetary Union’s Stock Exchange (BRVM) through returns predictability tests," SN Business & Economics, Springer, vol. 3(9), pages 1-27, September.
    11. Bock, J. & Geissel, S., 2024. "Evolution of stock market efficiency in Europe: Evidence from measuring periods of inefficiency," Finance Research Letters, Elsevier, vol. 62(PA).
    12. Andriy Stavytskyy & Ganna Kharlamova & Olena Komendant & Jarosław Andrzejczak & Joanna Nakonieczny, 2021. "Methodology for Calculating the Energy Security Index of the State: Taking into Account Modern Megatrends," Energies, MDPI, vol. 14(12), pages 1-19, June.
    13. Ignacio Escanuela Romana & Clara Escanuela Nieves, 2023. "A spectral approach to stock market performance," Papers 2305.05762, arXiv.org.
    14. García-Monleón, Fernando & González-Rodrigo, Elena & Bordonado-Bermejo, María-Julia, 2024. "Coexistence of sustainability and growth in different economies," Journal of Business Research, Elsevier, vol. 170(C).
    15. Marina Malkina & Anton Ovcharov, 2021. "Tourism Industry Stress Index And Its Relationship To The Financial Stress Index," Tourism and Hospitality Management, University of Rijeka, Faculty of Tourism and Hospitality Management, vol. 27(2), pages 363-383, July.
    16. Reza Yarbakhsh & Mahdieh Soleymani Baghshah & Hamidreza Karimaghaie, 2023. "Predicting risk/reward ratio in financial markets for asset management using machine learning," Papers 2311.09148, arXiv.org.
    17. Deniz Erer & Elif Erer & Selim Güngör, 2023. "The aggregate and sectoral time-varying market efficiency during crisis periods in Turkey: a comparative analysis with COVID-19 outbreak and the global financial crisis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-25, December.
    18. DODERO ORTIZ DE ZEVALLOS Gino Felix & CLEMENTE-ALMENDROS José Antonio & BAHAMONDES ROSADO María Emilia, 2023. "The Covid-19 Crisis And The Financial Impact On Family Firms," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 18(2), pages 86-108, August.

    More about this item

    Keywords

    COVID-19; capital market; random walk hypothesis; efficient market hypothesis; arbitration; portfolio diversification;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F3 - International Economics - - International Finance

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