A Test for Joint Market Efficiency from an Investor’s Perspective

Abstract

This paper investigates the cross-country correlation between stock markets and its implications. It does so by introducing a new measure called the Scaled Covariance Difference (SCD), which captures the difference between the covariance of short term returns and longer term returns. This measure has practical implications for portfolio optimization, as well as in testing for the joint efficiency of markets. Our focus in this paper is on including the off-diagonal terms of the variance-covariance matrix in the analysis so as to develop a test for joint market efficiency, unlike the univariate tests for market efficiency which only make use of information along the main diagonal of the variance-covariance matrix. We also demonstrate how to implement the test for joint market efficiency using data on weekly stock returns from the Nifty and S&P 500 indices.