Measuring capital market efficiency: Global and local correlations structure

TL;DR

This paper proposes a novel measure of capital market efficiency based on correlation structures and herding behavior, applied to global stock indices, revealing geographical patterns in efficiency levels.

Contribution

It introduces a new efficiency measure incorporating correlation and fractal analysis, providing a comprehensive assessment of global market efficiency.

Findings

Japanese NIKKEI is the most efficient market

European markets are generally more efficient

Latin America, Asia, Oceania are less efficient due to herding

Abstract

We introduce a new measure for the capital market efficiency. The measure takes into consideration the correlation structure of the returns (long-term and short-term memory) and local herding behavior (fractal dimension). The efficiency measure is taken as a distance from an ideal efficient market situation. Methodology is applied to a portfolio of 41 stock indices. We find that the Japanese NIKKEI is the most efficient market. From geographical point of view, the more efficient markets are dominated by the European stock indices and the less efficient markets cover mainly Latin America, Asia and Oceania. The inefficiency is mainly driven by a local herding, i.e. a low fractal dimension.