Market efficiency today

This CFS Working Paper has been presented at the CFSsymposium "Market Efficiency Today" held in Frankfurt/Main on October 6, 2005. In 2004 the Center for Financial Studies (CFS) in cooperation with the Johann Wolfgang Goethe University, Frankfurt/Main established an international academic prize, which is to be known as The Deutsche Bank Prize in Financial Economics. The prize will honor an internationally renowned researcher who has excelled through influential contributions to research in the fields of finance and money and macroeconomics, and whose work has lead to practice and policy-relevant results. The Deutsche Bank Prize in Financial Economics has been awarded for the first time in October 2005. The prize, sponsored by the Stiftungsfonds Deutsche Bank im Stifterverband für die Deutsche Wissenschaft, carries a cash award of € 50,000. The prize will be awarded every two years and the prize holder will be appointed a "Distinguished Fellow" of the CFS. The role of media partner for the Deutsche Bank Prize in Financial Economics is to be filled by the internationally renowned publication, The Economist and the Handelsblatt, the leading German-language financial and business newspaper

Individual Rationality and Market Efficiency

The demonstration by Smith [1962] that prices and allocations quickly converge to the competitive equilibrium in the continuous double auction (CDA) was one of the first – and remains one of the most important results in experimental economics. His initial experiment, subsequent market experiments, and models of price adjustment and exchange have added considerably to our knowledge of how markets reach equilibrium, and how they respond to disruptions. Perhaps the best known model of exchange in CDA market experiments is the random behavior in the “zero-intelligence” (ZI) model by Gode and Sunder [1993]. They conclude that even without trader rationality the CDA generates efficient allocations and “convergence of transaction prices to the proximity of the theoretical equilibrium price,” provided only that agents meet their budget constraints. We demonstrate that – by any reasonable measure – prices don’t converge in their simulations. Their budget constraint requires that a buyer’s currency never exceeds her value for the commodity, which is an unnatural restriction. Their conclusion that market efficiency results from the structure of the CDA independent of traders’ profit seeking behavior rests on their claim that the constraints that they impose are a part of the market institution, but this is not so. We show that they in effect impose individual rationality, which is an aspect of agents' behavior. Researchers on learning in markets have been misled by their interpretation of the ZI simulations, with deleterious effects on the debate on market adjustment processes.Bounded rationality; double auction; exchange economy; experimental economics; market experiment; "zero intelligence" model

Capital market efficiency: an update

Capital market

Adaptive market hypothesis

Purpose: To investigate the implications of the Addaptive Market Hypothesis (AMH) on Turkish stock exchange market (Borsa Istanbul) indices as an emerging economy. BIST-100, BIST-30 and BIST-All indices are subjected to the analyses for the period between January 2002 and April 2017. Design/Methodology/Approach: Two-year rolling windows and daily test values were calculated by using linear methods (Variance Ratio Test) and nonlinear methods (BDS test) to investigate the market efficiency. Findings: According to the Variance Ratio Test results, index returns are unpredictable, that is, the market is efficient, while the results of nonlinear analysis show the existence of adaptive market hypothesis. In particular, all three indices display efficiency in the 2013-2016 period implying that returns were not predictable in this period. The results of the non-linear analysis show that the market is efficient from time to time and sometimes deviates from efficiency, indicating the validity of the adaptive market hypothesis in Borsa Istanbul. Practical Implications: The changes in the market efficiency from time to time should be considered while taking important investment decisions. Moreover, according to AMH, since trends, panics, bubbles and crashes exist in the market, arbitrage opportunities arise time to time, and market timing is an important issue to catch the profit opportunities. Therefore, as a further study, matching the important events with the efficiency of the market could provide more insights about timing the market. Originality/Value: To the best of authors’ knowledge, this is the first comprehensive study that examines the index based AMH in Borsa Istanbul. This study is believed to contribute to the literature by giving insights about the evolution of market efficiency in Turkey.peer-reviewe