The evolution of stock market efficiency in the US: a non-Bayesian time-varying model approach |
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Authors: | Mikio Ito Tatsuma Wada |
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Institution: | 1. Faculty of Economics, Keio University, Tokyo, Japan;2. Faculty of Policy Management, Keio University, Fujisawa, Japan |
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Abstract: | A non-Bayesian time-varying model is developed by introducing the concept of the degree of market efficiency that varies over time. This model may be seen as a reflection of the idea that continuous technological progress alters the trading environment over time. With new methodologies and a new measure of the degree of market efficiency, we examine whether the US stock market evolves over time. In particular, a time-varying autoregressive (TV-AR) model is employed. Our main findings are: (i) the US stock market has evolved over time and the degree of market efficiency has cyclical fluctuations with a considerably long periodicity, from 30 to 40 years; and (ii) the US stock market has been efficient with the exception of four times in our sample period: during the long recession of 1873–1879; the recession of 1902–1904; the New Deal era; and the recession of 1957–1958 and soon after it. It is then shown that our results are partly consistent with the view of behavioural finance. |
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Keywords: | Market efficiency non-Bayesian time-varying AR model degree of market efficiency the adaptive market hypothesis |
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