The (In)Efficiency of Emerging and Developed Markets: An Analysis from Fractal Theory

ABSTRACT

The objective of this article is to study the behavior of the stock markets in emerging countries (BRICS) and developed countries (USA, England, Germany, and Japan), aiming to identify the evolution of their degree of efficiency between June 2007 and July 2021 based on the hypothesis of fractal markets. Using the Hurst exponent, the fractal dimension, and entropy approximation, it was built a market efficiency index. Among the main results, inconstancy of the efficiency indices over time was identified, which is consistent with previous studies within the field of econophysics. In addition, most of the inefficiency is due to the presence of deterministic elements in asset price variations, with a similarity in the efficiency level between the groups of emerging and developed countries, except for the case of China, which presented a singular behavior, which motivates new studies in this market. Finally, the results indicate the relevance of the cointegration effects of the analyzed markets, which is reflected in the inefficiencies of these markets over time.

Keywords:
econophysics; fractal markets hypothesis; efficient market hypothesis; emerging and developed markets