Measuring capital market efficiency: Long-term memory, fractal dimension and approximate entropy

We utilize long-term memory, fractal dimension and approximate entropy as input variables for the Efficiency Index [Kristoufek & Vosvrda (2013), Physica A 392]. This way, we are able to comment on stock market efficiency after controlling for different types of inefficiencies. Applying the methodology on 38 stock market indices across the world, we find that the most efficient markets are situated in the Eurozone (the Netherlands, France and Germany) and the least efficient ones in the Latin America (Venezuela and Chile).Comment: 12 pages, 1 figure, 4 table

Testing non-linearity using a modified Q test

A new version of the Q test, based on generalized residual correlations (i.e. auto-correlations and cross-correlations), is developed in this paper. The Q test fixes two main shortcomings of the Mcleod and Li Q (MLQ) test often used in the literature: (i) the test is capable to capture some interesting non-linear models, for which the original MLQ test completely fails (e.g. a non-linear moving average model). Additionally, the Q test also significantly improves the power for some other non-linear models (e.g. a threshold moving average model), for which the original MLQ test does not work very well; (ii) the new Q test can be used for discrimination between simple and more complicated (non-linear/asymmetric) GARCH models as well

A Technical Analysis Indicator Based On Fuzzy Logic

AbstractIn this paper an indicator for technical analysis based on fuzzy logic is proposed, which unlike traditional technical indicators, is not a totally objective mathematical model, but incorporates subjective investor features such as the risk tendency. The fuzzy logic approach allows representing in a more “human” way the decision making reasoning that a non-expert investor would have in a real market. Such an indicator takes as input, general market information like profitability and volatility of the stock prices, while the outputs are the buy and sell signals. In addition to present the detailed formulation of the indicator, in this paper a validation for the same is presented, which makes use of a multi-agent based simulation platform within which the behavior and profits obtained by agents that used traditional technical indicators such as MA, RSI and MACD, are compared against those obtained by agents that use the fuzzy indicator for the decision making process

Financial Market Integration Between Stock Market From North American Free Trade Agreement (NAFTA) Member

Economic recession or crisis could show a higher possibility of financial crisis transmission in an integrated stock market. Integration between financial markets is a channel of spreading the devastating effects of the crisis. The objective of this study is to detect significant interactions among the stock markets of countries that are members of the North American Free Trade Agreement (NAFTA). NAFTA is a regional partnership with members from the United States, Canada and Mexico that are committed to reducing trade and investment barriers between member countries. The methodology of this research with VAR VECM model consists of three stages, the first analysis of the presence impact of the stock market index using the Granger Causality Test. Second, analyze the speed of response of an index to a change / shock in another index using the Impulse Response Function (IRF). The third stage analyzes the impact of changes / shocks from one index to other indices by using Variance Decomposition. From the 5 sets of stock market data for NAFTA countries, the results of the study show that there is only one cointegration. When viewed in the cointegration process of each of the two data series, cointegration occurs between the Nasdaq index with TSE and Nasdaq with MSE. Whereas TSE and MSE did not find any cointegration

Basel Accord and Financial Intermediation: The Impact of Policy

This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough. We find that active monetary policy increases loan volume even when the economy is in good shape; introducing active capital requirement policy can be effective as well if it implies tightening of regulation in bad times. This is performed with an heterogeneous agent economy with occupational choice, financial intermediation and aggregate shocks to the distribution of entrepreneurial returns.bank capital channel, capital requirements, Basel Accord, occupational choice, bankruptcy, credit crunch

The Analysis of Volatility of Selected Countries' Exchange Rates

This paper is focused on the historical development of selected exchange rates' volatility, that is: AUD, CAD, DEM, DKK, EUR, FRF, GBP, JPY, SEK and CHF against USD. The paper aims to show that relatively large increment of exchange markets' volatility is nothing special in the historical context considering the lenght and the extent.exchange, rate, volatility, ARCH, GARCH

Stock Exchange Mergers and Market Efficiency

The aim of this paper is to examine the positive and negative impacts of stock exchange mergers on the informational efficiency of the markets. We consider a range of factors in relation to the stock exchange merger, that can potentially affects market efficiency, after a merger. These factors include the maturity of the markets being merged, the size of the markets, and different types of mergers (developed markets versus developing markets; large stock exchange mergers versus small stock exchange mergers; and domestic stock exchange mergers versus cross-border stock exchange mergers). For this purpose, we use a time-varying return predictability test which allows us to detect periods of (in)efficiency, and thus to conduct a comparative analysis for pre-merger and post-merger periods. We find that increases in efficiency are less frequent than decreases in efficiency after a stock exchange merger. Finally, we provide the empirical evidence that the impact on efficiency depends on range of the characteristics of the merger: stock exchange's country's level of development, size, geographical diversification and industrial diversification

Measuring capital market efficiency: Global and local correlations structure

We introduce a new measure for the capital market efficiency. The measure takes into consideration the correlation structure of the returns (long-term and short-term memory) and local herding behavior (fractal dimension). The efficiency measure is taken as a distance from an ideal efficient market situation. Methodology is applied to a portfolio of 41 stock indices. We find that the Japanese NIKKEI is the most efficient market. From geographical point of view, the more efficient markets are dominated by the European stock indices and the less efficient markets cover mainly Latin America, Asia and Oceania. The inefficiency is mainly driven by a local herding, i.e. a low fractal dimension.Comment: 18 page

Malaysian property and construction companies: diversification potential, stock price behaviour and its response towards macroeconomic shocks

This thesis investigates diversification benefits of investing in the property and construction stocks in Malaysia from 1995 to 2013 by using correlation analysis. Panel ARDL (autoregressive distributed lag) is used to examine the relationship between both sectors’ stock prices and their fundamental variables (NAV (net asset value), EPS (earnings per share) and DPS (dividend per share)), where it involves panel cointegration and error correction mechanism (ECM). Another objective of this thesis is to discover the impact of macroeconomic shocks on both sectors’ stock prices, which is investigated through the impulse response analysis and variance decomposition analysis. Annual data from twenty-eight listed property companies and sixteen listed construction companies are evaluated. Diversification benefits do exist between both sectors’ stocks. EPS is a significant fundamental variable for explaining both sectors’ stock price change while NAV is only significant in influencing property stock price changes. DPS is not relevant for both sectors. The ECM shows that both sectors’ stock prices move back to equilibrium at a fairly similar speed. The impulse response functions results indicate that interest rate changes influence stock prices the most while trade openness shocks have slight effects on the stock prices. Variance decomposition analysis found that the percentage movement in the stock prices is highest when shocked by interest rate changes while trade openness changes do not influence the stock prices significantly. The impact on property stock prices is higher to economic shocks compared to the construction sector. The findings could aid investors in making sound decisions about their investment as it is proven that they could benefit from investing in both sectors. Investors could look into the fundamental variables which are useful in determining the stock prices movements. Policy makers should control the interest rate adjustments, determine the GDP growth rate, monitor the inflation rate and trade openness policies as shocks to these variables are proven to affect stock prices significantly