Are the GIPS sovereign debt markets efficient during a crisis?

The efficient market hypothesis (EMH) has been around since 1962. It is a theory based on a simple rule, which states that the price of any asset must fully reflect all available information. Yet, there is empirical evidence suggesting that markets are too volatile to be efficient. In essence, this evidence suggests that the reaction of market participants to information or events is the crucial factor, rather than the information itself. This highlights the need to include behavioral finance theory in the pricing of assets. This paper aims to analyze the efficiency of the Greek, Italian, Portuguese and Spanish (ie, GIPS) sovereign debt markets during crises: in essence, the recent global financial and sovereign debt crises. We use a generalized autoregressive conditional heteroscedasticity (GARCH)-based variance bound test to test the null hypothesis of the market being too volatile to be efficient. In general, our EMH tests gave mixed results; this points to an acceptance of our null hypothesis that the market is too volatile to be efficient. Interestingly, a number of observations also pointed to a rejection of the null hypothesis that the market is too volatile to be efficient.