A New Measure of Market Inefficiency
Open Access
- 10 June 2021
- journal article
- research article
- Published by MDPI AG in Journal of Risk and Financial Management
- Vol. 14 (6), 263
- https://doi.org/10.3390/jrfm14060263
Abstract
Financial crises, such as the Great Financial Crisis of 2007–2009 and the COVID-19 Crisis of 2020–2021, lead to high volatility in financial markets and highlight the importance of the debate on the Efficient Markets Hypothesis, a corollary of which is that in an efficient market it should not be possible to systematically make excess returns. In this paper, we discuss a new empirical measure—Excess Trading Returns—that distinguishes between market and trading returns and that can be used to measure inefficiency. We define an Inefficiency Matrix that can provide a complete, empirical characterization of the inefficiencies inherent in a market. We illustrate its use in the context of empirical data from a pair of model markets, where information asymmetries can be clearly understood, and discuss the challenges of applying it to market data from commercial exchanges.This publication has 27 references indexed in Scilit:
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