Market Inefficiency is Multi-Dimensional: Evidence from 76 Price Indices

Abstract

This paper is the first to present explicit empirical evidence that market inefficiency is multi-dimensional. Testing the Efficient Market Hypothesis (EMH) over 76 stock indices using 17 well accepted indicators (e.g. runs test), results show that most indices exhibit some type(s) of inefficiency and that indicators differ from each other in terms of statistical power and/or the type of inefficiency detected. A principal components analysis (PCA) demonstrates that indicators group along orthogonal dimensions, and hence a market can be inefficient by exhibiting short-term memory, long-term memory and/or calendar effects, which are all distinct sources of inefficiency. This research provides a clearer picture of the extent and nature of market inefficiency, helps explain conflicting previous findings, and suggests a new framework for studying market efficiency.