Time-varying global financial market inefficiency: an instance of pre-, during, and post-subprime crisis

Rahul Roy (1) , Shijin Santhakumar (1)

1 Department of Commerce

The informational efficiency is the central backdrop among researchers in the quest of behavioral finance since Fama (J Financ 25:383–417, 1970). The succession of time has witnessed the dramatic transformation in the field of global stock markets over the years, and subsequently the liberalization– privatization–globalization played the role of catalyst to form the global stock market convergence. Predominantly, the financial liberalization in the foreign policies over the last two decades enabled the institutional and rational investors to diversify their risk through holding different classes of asset, forming the portfolio. However, the availability of investment opportunity sets to investor in two stock markets subsequently results in portfolio diversification, and hence arbitrage occurs simultaneously across the two markets (Ito et al., Appl Financ 46(23):2744–2754, 2014). The country risk premium and world risk premium in segmented market and integrated market concurrently vary, and thus it is perceivable to examine the joint efficiency among the various stock markets when markets are highly integrated. This study aims to analyze the time-varying structure of world market dynamic linkages and the persistence of global financial market inefficiency present during an instance of subprime crisis.

Mots clés: Market dynamics; Time-varying VAR model; GARCH; ARCH; Subprime crisis; Time-varying global financial market inefficiency

Domaines: Pricing [q-fin.PR]; Gestion de portefeuilles [q-fin.PM]; Gestion des risques [q-fin.RM]; Microstructure des marchés [q-fin.TR]

Rahul Roy, Shijin Santhakumar. Time-varying global financial market inefficiency: an instance of pre-, during, and post-subprime crisis. DECISION : Official Journal of Indian Institute of Management Calcutta, 2014, 41 (4), pp.449-488. ⟨10.1007/s40622-014-0061-1⟩. ⟨hal-01660506⟩