Time Evolution of Market Efficiency and Multifractality of the Japanese Stock Market

Tetsuya Takaishi

doi:10.3390/jrfm15010031

Abstract

This study investigates the time evolution of market efficiency in the Japanese stock markets, considering three indices: Tokyo Stock Price Index (TOPIX), Tokyo Stock Exchange Second Section Index, and TOPIX-Small. The Hurst exponent reveals that the Japanese markets are inefficient in their early stages and improve gradually. TOPIX and TOPIX-Small showed an anti-persistence around the year 2000, which still persists. The degree of multifractality varies over time and does not show that the Japanese markets are permanently efficient. The multifractal properties of the Japanese markets changed considerably around the year 2000; this may have been caused by the complete migration from the stock trading floor to the Tokyo Stock Exchange’s computer trading system and the financial system reform, also known as the “Japanese Big Bang”.

Highlights

The efficient market hypothesis (EMH) developed and classified by Fama (1970) is an important financial issue because it is crucial to find an optimal trading strategy for institutional investors and practitioners by assessing the correct market status
Since the Gaussian time series are monofractal, the appearance of multifractality means a certain deviation from the Gaussian time series or some market inefficiency. Multifractality offers another insight into market efficiency, and we examine the market efficiency by the degree of multifractality via generalized Hurst exponent (GHE)
By examining the multifractality of return time series, we show that the time series property of the Japanese stock markets changed considerably in around 2000 and infer that this property-change is attributed to the complete migration from the stock trading floor to the Tokyo Stock Exchange’s (TSE’s) computer trading system as well as the Japanese financial reform, known as the “Japanese Big Bang”, that was established in the late 1990s

Summary

Introduction

The efficient market hypothesis (EMH) developed and classified by Fama (1970) is an important financial issue because it is crucial to find an optimal trading strategy for institutional investors and practitioners by assessing the correct market status. In an efficient market, one may adopt a simple strategy to replicate an investment index. The weak-form efficient market only discusses historical prices. Under this market, the return time series shows no profitable predicting power for future returns. The weak-form efficient market has been substantially tested in the literature, no definite evidence on the EMH has been obtained; rather, the possibility of time-varying market efficiency has been discussed (Lim and Brooks 2011)

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