Impact of the 2020 and 2022 Events on the Efficiency of Europe’s Capital Markets
Impact of the 2020 and 2022 Events on the Efficiency of Europe’s Capital Markets

Author(s): Paula Heliodoro, Rui Dias, Nicole Horta, Paulo Alexandre, Mariana Chambino
Subject(s): Social Sciences
Published by: Udruženje ekonomista i menadžera Balkana
Keywords: European capital markets; BDS; DFA Random Walk; Arbitrage
Summary/Abstract: This paper intends to test efficiency, in its weak form, in the capital markets of the Netherlands (AEX), Belgium (BEL 20), France (CAC 40), Ireland (ISEQ 20), and Portugal (PSI 20), for the period from September 18th, 2017, to September 15th, 2022. Given the skewness and kurtosis coefficients, the time series shows signs of deviation from the normality hypothesis. We also observe that during the Tranquil and second Covid-19 wave subperiods, European equity markets are in equilibrium and that the (in) efficiency hypothesis, in its weak form, does not hold, implying that investors will struggle to achieve returns above the market average without incurring additional risk. When we examine the first Covid-19 subperiod, we find that all capital markets show long memories, indicating a propensity to forecast returns, particularly the Portuguese capital market shows the highest value of persistence (0.65), while the stock indexes of Belgium (BEL 20), France (CAC 40), Ireland (ISEQ 20) have exponents of 0.62, and the Netherlands 0.61. In the fourth sub-period that corresponds to the Russian invasion of Ukraine in 2022, we find that the efficiency hypothesis, in its weak form, is rejected for all stock indexes, except for the French capital market (CAC 40). When the sub-periods of the first wave of COVID-19 and the Russian invasion of Ukraine in 2022 are compared, we notice that markets exhibit more pronounced imbalances during the first wave of COVID-19, due in large part to uncertainty regarding the course of the 2020 pandemic. In addition, we empha¬size that during subperiods of higher uncertainty in the global economy, prices do not fully reflect available information and that price fluctuations are not i.i.d. In other words, there is a reversion to the mean, and prices become predictable, allowing regional and international investors to achieve above-market average returns. The authors suggest that these findings are significant for regulators and supervisors of European capital markets to promote efforts to guarantee that available market information is rectified more effectively.

• Details
• Contents