Testing Market Efficiency during COVID-19 Pandemic - A Study of Select Global Indices

Abstract

Efficient Market Hypothesis (EMH), one of the profound theories of finance, related to capital markets, has often undergone criticism, yet tested time and again. EMH, states that in an efficient market current prices of securities reflect all publicly available information, and shares are traded at their fair values. Anomalies in information availability are not possible and no individual investor can get superior returns. Hence, prices/stocks move in random, supporting Random Walk Theory. Timing of investment also would not fetch better returns than market returns. Adaptive Market Hypothesis (AMH), contrary to EMH, argues that stock/index returns do not follow a random walk process, rather follow a trend, and predictions can be made concerning stocks ’/index returns. It also asserts that financial markets are neither efficient nor inefficient, but they shift between efficient and inefficient. Thus, markets are adaptive and will have frictions. Further, AMH will also assume that the risk-reward of investors changes over a while, historical prices influence current prices and constant arbitrage opportunities are created.COVID-19 like crisis provided an opportunity to generate excess returns as stocks trading below their fair value. The first corona case was reported in November 2019 and a sharp fall of global markets was witnessed. Though markets recovered from their respective lows, its impact is still being faced across major parts of the globe till early 2021. The present study analyzed the efficiency of 44 world major stock exchanges (Asia-Pacific-17, Europe-16, America-6 & Africa-5) for 15 months (November 2019 to January 2021), and tested whether markets moved randomly or marketed in adaptive nature i.e. whether EMH holds good in conditions like these or does AMH holds good. Results of Hurst exponent & Variance Test ratio to test the proved that markets are adaptive.