The (In)Efficiency of Emerging and Developed Markets: An Analysis from Fractal Theory
| Autor | Daniel Pereira Alves de Abreu, Marcos Antônio de Camargos, Aureliano Angel Bressan |
| Cargo | Universidade Federal de Minas Gerais, Centro de Pós-Graduação e Pesquisas em Administração, Belo Horizonte, MG, Brazil - Instituto Brasileiro de Mercado de Capitais, Belo Horizonte, MG, Brazil - Universidade Federal de Minas Gerais, Faculdade de Ciências Econômicas, Belo Horizonte, MG, Brazil |
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BAR-Brazilian Administration Review, 20(1), e220051, 2023.
Research Article
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Keywords:
econophysics; fractal markets hypothesis;
ecient market hypothesis; emerging and
developed markets.
JEL Code:
G140.
The (In)Eciency of Emerging and Developed
Markets: An Analysis from Fractal Theory
Daniel Pereira Alves de Abreu1 , Marcos Antônio de Camargos1,2 , Aureliano Angel Bressan3
1 Universidade Federal de Minas Gerais, Centro de Pós-Graduação e Pesquisas em Administração, Belo Horizonte, MG, Brazil
2 Instituto Brasileiro de Mercado de Capitais, Belo Horizonte, MG, Brazil
3 Universidade Federal de Minas Gerais, Faculdade de Ciências Econômicas, Belo Horizonte, MG, Brazil
How to cite: Abreu, D. P. A., Camargos, M. A., & Bressan, A. A. (2023). The (in)eciency of emerging and developed markets: An analysis from fractal theory.
BAR-Brazilian Administration Review, 20(1), e220051.
DOI: https://doi.org/10.1590/1807-7692bar2023220051
Received:
April 14, 2022.
This paper was with the authors for one revision.
Accepted:
February 09, 2023.
Publication date:
February 24, 2023.
Funding:
The authors thank the Ministério da Ciência, Tecnologia e
Inovação, Conselho Nacional de Desenvolvimento Científico
e Tecnológico for the financial support for the research in this
article.
Conflict of Interests:
The authors have stated that there is no conflict of interest.
Corresponding author:
Daniel Pereira Alves de Abreu
Universidade Federal de Minas Gerais, Centro de Pós-
Graduação e Pesquisas em Administração,
Av. Pres. Antônio Carlos, n. 6627, CEP 31270-901,
Belo Horizonte, MG, Brazil
danielpabreu22@gmail.com
Editor-in-Chief:
Ivan Lapuente Garrido
(Universidade do Vale do Rio dos Sinos, Brazil).
Associate Editor:
Fabiano Guasti Lima
(Universidade de São Paulo, Brazil).
Reviewers:
Two anonymous reviewers.
Editorial assistants:
Kler Godoy and Simone Rafael
(ANPAD, Maringá, Brazil).
ABSTRACT
The objective of this article is to study the behavior of the stock markets in emerg-
ing countries (BRICS) and developed countries (USA, England, Germany, and Japan),
aiming to identify the evolution of their degree of eciency 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 eciency index.
Among the main results, inconstancy of the eciency indices over time was identified,
which is consistent with previous studies within the field of econophysics. In addition,
most of the ineciency is due to the presence of deterministic elements in asset price
variations, with a similarity in the eciency 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 eects of the analyzed markets, which is reflected in the inecien-
cies of these markets over time.
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The (in)eciency of emerging and developed markets: An analysis from fractal theory
BAR-Brazilian Administration Review, 20(1), e220051, 2023.
INTRODUCTION
Since the 1960s, researchers in the field of finance have
sought to develop theories that explain the behavior of
financial assets and their agents, with the ecient mar-
ket hypothesis (EMH), formalized by Fama (1970), as the
main result. However, recent empirical studies have in-
dicated that asset prices do not behave in a purely ran-
dom way, highlighting issues related to informational
asymmetry and divergence of investors’ expectations
(Kahneman & Tversky, 2013; Shiller, 2003). In this context,
new theoretical currents have been developed to ex-
plain market behavior, providing a counterpoint to EMH.
From a neopositivist perspective, econophysics
emerges as a branch of market eciency analysis, which
is based on the fractal characteristics of the market and
chaos theory (Peters, 1994). In this perspective of the so-
called fractal markets hypothesis (FMH), the market has
random movements in the short run due to new infor-
mation; however, patterns of behavior could be iden-
tified in the long run (Karp & Van Vuuren, 2019). In this
way, asset price movements would be based on mo-
ments of local mean holding or reversal over time.
Models based on this hypothesis have a more flexible
character compared to those based on the EMH, since
they do not presuppose any a priori economic theory
to prepare their analyses. In this way, the theories are
elaborated a posteriori, always based on the actual data
analyzed, which makes this approach have the poten-
tial to complement the economic literature (Jovanovic
& Schinckus, 2013).
In this context, this paper is guided by the follow-
ing question: How did the degree of market eciency,
based on fractal analysis, evolve in emerging and de-
veloped countries during the period analyzed? Based
on this question, the objective of this paper was to in-
vestigate the behavior of the stock market of emerg-
ing countries (BRICS) and developed countries (USA,
England, Germany, and Japan), aiming to identify the
(co)evolution of their degree of eciency from a longi-
tudinal perspective based on the fractal markets hypoth-
esis, considering the sample window from June 2007 to
July 2021.
To this end, the methodology proposed by Kristoufek
and Vosvrda (2014) was used, with the construction of
an eciency index with moving windows, in order to
capture short- and long-term memory eects, as well as
the entropy of the time series of market returns. Thus, it
was sought to analyze the hypothesis that the markets
of developed and emerging countries follow the behav-
ior advocated by the EMH in dierent time windows,
against the hypothesis that they have ineciencies in
their joint movements (comovements).
Among the research justifications, there is no con-
sensus in the literature on the issue of market ecien-
cy, and, according to Karp and Van Vuuren (2019), the
identification of market behavior in dierent time win-
dows is relevant for resource allocation, for investment
strategies, and for understanding the dynamics of the
comovements of emerging and developed countries.
According to Mensi et al. (2016), both in market and eco-
nomic terms, the BRICS requires specific studies, consid-
ering its role in the world economy and its peculiarities.
Additionally, the identification of possible dierences in
the behavior of the degree of eciency between emerg-
ing and developed markets is opportune.
Furthermore, the present study focuses on a longitu-
dinal analysis of a data sample exceeding 10 years, both
for the eciency index generated and for the elements
that compose it. Thus, the scope of the work is to under-
stand how the degree of eciency of the selected mar-
kets has behaved over the years, as well as to perform a
comparative analysis of the results between the groups
of emerging and developed countries.
From a practical point of view, this study also enables
the identification of less ecient markets under the EMH
perspective. In this context, it can assist in the selection
of the market to invest in, given the greater chance of ar-
bitrage. From a theoretical point of view, the study aims
to validate the analyses of previous studies as well as
deepen their discussions about the behavior of emerg-
ing and developed markets in light of EMH. Finally, it also
aims to contribute to the literature in methodological
terms by exploring the fractal strand of time series anal-
ysis, which is still little used in finance studies in the na-
tional literature.
THEORETICAL BACKGROUND
Ecient market hypothesis — EMH
The EMH theory is derived from Bachelier’s (1900) spec-
ulation theory, which uses a random walk model to
describe the behavior of asset prices in the market. In
this way, prices reflect all available information, plus a
random eect of several external factors. Expectations
of the economic value and cash flow generation of
companies are quickly incorporated into market prices,
which makes it impossible to obtain abnormal profits
consistently (Fama, 1970).
Three main conditions can be defined for the exis-
tence of an ecient market: the absence of transaction
costs; informational symmetry; and consensus on the
eects of this information on asset pricing. In this sense,
the value of assets would reflect all past information and
future expectations, which would be homogeneous, so
that the estimates made by market agents would be the
best approximation of the intrinsic value of securities
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