Comparing Stock Market Efficiency with Detrended Fluctuation Analysis
| Authors | |
|---|---|
| Year of publication | 2015 |
| Type | Article in Proceedings |
| Conference | European Financial Systems 2015. Proceedings of the 12th International Scientific Conference |
| MU Faculty or unit | |
| Citation | |
| Web | http://is.muni.cz/do/econ/sborniky/2015/EFS_2015_proceedings.pdf |
| Field | Management and administrative |
| Keywords | Efficient Market Hypothesis; Random Walk; Detrended Fluctuation Analysis; DAX; SHCOMP |
| Description | Efficient market hypothesis is a core assumption of financial economics upon which the majority of asset pricing models are built. Therefore, before employing asset pricing models for the cost of capital calculations and stock performance predictability, we need to test the random walk properties of stock prices. EMH is closely related to random walk hypothesis that implies unpredictability of stock returns behavior on financial markets. The measure of the random walk content of stock returns is computed with detrended fluctuation analysis of Peng et al. (1994). According to the EMH, the returns within time series present uncorrelated values and are not predictable on a historical basis. The detrended fluctuation analysis is implemented to check the possible correlations in price returns within the studied time series. We measure scaling exponents (core measurement in DFA methodology) of financial markets for China and Germany, which are considered as emerging and developed economies. Since developing economies are supposed to be less efficient then developed ones, we check if the difference in presumed efficiency levels are reflected in the levels of scaling exponents. The expectation is to understand whether both of the markets could be the “platform” for applying classic asset pricing models, that require financial markets being efficient. |
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