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AN ALTERNATIVE DEFINITION OF MARKET EFFICIENCY AND SOME COMMENTS ON ITS EMPIRICAL TESTING

                                                                Alexandros E. Milionis
                                                                     Bank of Greece

ABSTRACT

An alternative definition for market efficiency, based on econometric rather than financial arguments is suggested. It is argued that this new definition, though equivalent to the existing one, has some comparative advantages. Moreover, the conditions under which the results from the application of some commonly used methods for the empirical testing of market efficiency are meaningful are examined, and guidelines for practitioners are suggested. Further, market efficiency is examined in a time-varying risk framework.

Keywords: Market efficiency; Return predictability; Serial correlation in stock returns; Market efficiency in the presence of conditional heteroscedasticity.

JEL classification: G14; C10; C22

Acknowledgements: The author is grateful to Heather Gibson and an anonymous referee for helpful comments. The views expressed in the paper are those of the author and do not necessarily reflect those of the Bank of Greece.

Correspondence:

Alexandros E. Milionis,
University of the Aegean,
Department of Statistics and Actuarial-Financial Mathematics,
Ktirio Bourlioti, Karlovassi,
Samos, 83200, Greece,
Tel.: +30 2273082350,
Fax: +30 2273082309,
Email: amilionis@aegean.gr


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