The impact of the 2008 and 2010 financial crises on the Hurst exponents of international stock markets: Implications for efficiency and contagion

This study analyzes how the 2008 and 2010 financial crises, which began in the US and Greece respectively, affected the Hurst exponents of index returns of the stock markets of Belgium, France, Greece, Japan, the Netherlands, Portugal, the UK and US. We perform two innovative statistical tests for this purpose. The first assesses whether the returns exhibit a long memory in the pre-crisis and crisis periods and determines the extent to which the Hurst exponents, calculated with the multifractal detrended moving average technique (MFDMA), differ from the tranquil to the crisis periods. The second test uses copula models to assess whether the correlation between the local Hurst exponents of the markets where the crises originated and those of the other markets increased due to the crises. The results of the first test suggest that although most of the returns exhibit a long memory in the 2008 crisis period, this is not the case in either the pre-crisis or the 2010 crisis periods. These findings shed light on the dynamics of market efficiency. The results of the second test show a significant increase in correlation between the local Hurst exponents of several markets, suggesting the existence of financial contagion. We observed that the 2008 crisis had a greater impact on the memory properties of stock returns than the 2010 financial crisis.

[1]  H. Stanley,et al.  Time-dependent Hurst exponent in financial time series , 2004 .

[2]  Andrea Beltratti,et al.  Comovements in International Stock Markets , 2008 .

[3]  Sergio Da Silva,et al.  Hurst exponents, power laws, and efficiency in the Brazilian foreign exchange market , 2007 .

[4]  Thorsten Schmidt,et al.  Coping with Copulas , 2006 .

[5]  Contagion effects in the European NYSE Euronext stock markets in the context of the 2010 sovereign debt crisis , 2013 .

[6]  B. M. Tabak,et al.  The Hurst exponent over time: testing the assertion that emerging markets are becoming more efficient , 2004 .

[7]  Scaling Power Laws in the Sao Paulo Stock Exchange , 2002 .

[8]  G. Oh,et al.  Hurst exponent and prediction based on weak-form efficient market hypothesis of stock markets , 2007, 0712.1624.

[9]  F. Lillo,et al.  The Long Memory of the Efficient Market , 2003, cond-mat/0311053.

[10]  H. Stanley,et al.  Multifractal Detrended Fluctuation Analysis of Nonstationary Time Series , 2002, physics/0202070.

[11]  Ladislav Kristoufek,et al.  Fractal Markets Hypothesis and the Global Financial Crisis: Scaling, Investment Horizons and Liquidity , 2012, Adv. Complex Syst..

[12]  Jae H. Kim,et al.  Stock Return Predictability and the Adaptive Markets Hypothesis: Evidence from Century Long U.S. Data , 2010 .

[13]  Wei-Xing Zhou,et al.  Detrending moving average algorithm for multifractals. , 2010, Physical review. E, Statistical, nonlinear, and soft matter physics.

[14]  Rongbao Gu,et al.  Analysis of efficiency for Shenzhen stock market based on multifractal detrended fluctuation analysis , 2009 .

[15]  C. Small,et al.  The theory and applications of statistical inference functions , 1988 .

[16]  B. M. Tabak,et al.  Does financial market liberalization increase the degree of market efficiency? The case of the Athens stock exchange , 2009 .

[17]  John Goddard,et al.  Are European Equity Markets Efficient? New Evidence from Fractal Analysis , 2011 .

[18]  J. Haan,et al.  Contagion during the Greek sovereign debt crisis , 2013 .

[19]  Gianni Amisano,et al.  Contagion and the European debt crisis , 2012 .

[20]  Graham Smith.  The changing and relative efficiency of European emerging stock markets , 2012 .

[21]  T. D. Matteo,et al.  Long-term memories of developed and emerging markets: Using the scaling analysis to characterize their stage of development , 2004, cond-mat/0403681.

[22]  On detection of volatility spillovers in overlapping stock markets , 2013 .

[23]  K. Domino.  The use of the Hurst exponent to predict changes in trends on the Warsaw Stock Exchange , 2011 .

[24]  Campbell R. Harvey,et al.  Foreign Speculators and Emerging Equity Markets , 1997 .

[25]  Erhan Bayraktar,et al.  A Limit Theorem for Financial Markets with Inert Investors , 2006, Math. Oper. Res..

[26]  Aristeidis Samitas,et al.  How Can a Small Country Affect the European Economy? The Greek Contagion Phenomenon , 2013 .

[27]  E. Fama.  Random Walks in Stock Market Prices , 1965 .

[28]  D. Grech,et al.  The local Hurst exponent of the financial time series in the vicinity of crashes on the Polish stock exchange market , 2008 .

[29]  K. Lim,et al.  Financial crisis and stock market efficiency: Empirical evidence from Asian countries , 2008 .

[30]  Cetin Ciner,et al.  Information asymmetry, speculation and foreign trading activity: Emerging market evidence , 2008 .

[31]  Zhi-Qiang Jiang,et al.  Testing the weak-form efficiency of the WTI crude oil futures market , 2012, 1211.4686.

[32]  C. Peng,et al.  Mosaic organization of DNA nucleotides. , 1994, Physical review. E, Statistical physics, plasmas, fluids, and related interdisciplinary topics.

[33]  A. Lo.  The Adaptive Markets Hypothesis , 2004 .

[34]  D. F. Unsal,et al.  Sovereign Spreads and Contagion Risks in Asia , 2011, SSRN Electronic Journal.

[35]  L. Kristoufek.  Rescaled Range Analysis and Detrended Fluctuation Analysis: Finite Sample Properties and Confidence Intervals , 2010 .

[36]  H. E. Hurst,et al.  Long-Term Storage Capacity of Reservoirs , 1951 .

[37]  R. Nelsen.  An Introduction to Copulas , 1998 .

[38]  Laura Inés Lazcano Benito,et al.  Financial crises and the transfer of risk between the private and public sectors: Evidence from European financial markets , 2014 .

[39]  Edgar E. Peters.  Fractal Market Analysis: Applying Chaos Theory to Investment and Economics , 1994 .

[40]  Sunil Kumar,et al.  Analyzing Crisis in Global Financial Indices , 2013 .

[41]  A. Carbone,et al.  Second-order moving average and scaling of stochastic time series , 2002 .

[42]  Carlos Mendes,et al.  Contagion effects of the subprime crisis in the European NYSE Euronext markets , 2010 .

[43]  A. Kontonikas,et al.  The EMU sovereign-debt crisis: Fundamentals, expectations and contagion , 2012 .

[44]  Antonios Garas,et al.  Correlation study of the Athens Stock Exchange , 2007 .

[45]  D. Grech,et al.  Can one make any crash prediction in finance using the local Hurst exponent idea , 2003, cond-mat/0311627.

[46]  R. Rigobón,et al.  No Contagion, Only Interdependence: Measuring Stock Market Comovements , 2002 .