Relative efficiency of equity ETFs: an adaptive market hypothesis perspective

Abstract

ABSTRACT In light of the growing prominence of passive investment schemes in general and Exchange Traded Funds (ETFs) in particular, this study examines the relative efficiency of domestic equity index ETFs across the globe from an Adaptive Market Hypothesis perspective. To be specific, we examine the relative efficiency of equity ETFs pertaining to Australia, Canada, China, Eurozone, France, Germany, India, Japan, UK and USA. We do so by employing rolling estimations of inherent long memory in these financial time series. Our findings indicate the presence of episodic long memory or anti-persistence in the first and second moments of these ETFs and their underlying indices. Put differently, the efficiency of ETFs and their underlying indices were found to be dynamic in nature. While our findings lend credence to Adaptive Market Hypothesis, they also (a) pinpoint the need for policy prescriptions geared towards diversifying investor base, and (b) call into question the past assertions that markets are becoming more efficient over time.