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European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance

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A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Financial Markets".

Deadline for manuscript submissions: closed (1 February 2023) | Viewed by 30552

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Special Issue Editor

Prof. Dr. Victor Dragotă

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Guest Editor

Department of Finance, Bucharest University of Economic Studies (ASE), 010374 București, Romania
Interests: investors' behaviour; efficient market hypothesis and behavioural finance; dividend policy; shareholders' behaviour, culture and agency problems; ownership and control; agency problems and control premium; capital structure and cost of capital; financial development

Special Issue Information

Dear Colleagues,

Regardless of whether it is assumed or contested, market efficiency is still a “hot” topic in investments and portfolio management. It is my pleasure to announce that I am editing a Special Issue of the Journal of Risk and Financial Management on European Stock Market Efficiency. Both theoretical and empirical contributions are welcomed. For all papers, the practical utility of decision-making in portfolio management is acknowledged. Different papers on the efficiency of all European countries’ stock markets are of interest: tests, anomalies, less studied capital markets, etc. The efficient market hypothesis (EMH) is challenged by many researchers, among whom researchers in behavioural finance have a central position. All these contrasting approaches are welcomed in this Special Issue.

Original approaches, with a focus on modelling investors’ behaviour, are especially encouraged. The interface between finance and sociocultural determinants can be an interesting development in finding determinants of market efficiency. Additionally, issues such as the applications of high-frequency data, analyzing the impact of stock returns’ distributions in testing EMH, effects of different extreme events (e.g., COVID-19) on market efficiency, etc. can be interesting developments.

Prof. Dr. Victor Dragotă
Guest Editor

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Journal of Risk and Financial Management is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1400 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

Efficient market hypothesis (EMH)
Asset pricing predictability
Investors’ behaviour
Behavioural finance
Sociocultural factors affecting EMH
Frontier markets
Emerging markets
Financial crisis
Stock returns’ distributions
Extreme events
High-frequency data

Published Papers (13 papers)

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Research

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17 pages, 2848 KiB

Open AccessArticle

Technology Shocks and the Efficiency of Equity Markets in the Developed and Emerging Economies: A Global VAR Approach

by Yinka S. Hammed and Afees A. Salisu

J. Risk Financial Manag. 2023, 16(3), 154; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm16030154 - 27 Feb 2023

Cited by 1 | Viewed by 1185

Abstract

We tested the connection between technology shocks and the efficiency of equity markets in developed and emerging economies. We augmented the Global Vector Autoregressive (GVAR) database that covers data on 33 developed and emerging markets with the newly constructed data for technology shocks involving two variants, one with 164 countries (GTS-164), and the other, which is more region-specific. covering only Organization for Economic Co-operation and Development (OECD) countries (GTS-OECD). Our analysis was then modeled with GVAR methodology. We found that a one standard positive innovation shock to global technology (GTS-164) raises real equity prices in nearly 70% of the markets considered, and this is sustained over the forecast periods. However, the response of real equity prices to a global-specific technology shock (GTS-OECD) is rather different. While this shock resulted in the immediate rise in real equity prices, it is only transient and dissipated after the third quarter of the forecast horizon in about 85% of these markets. By implication, the efficiency of the real equity market was assured for the region-specific technology shock rather than for the more encompassing measurement that takes account of numerous markets, not minding whether these markets are developed or emerging. In sum, technological shocks seem to have greater impacts on the efficiency of developed (including Euro) markets than other markets. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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15 pages, 1252 KiB

Open AccessArticle

Performance Analysis of Gold- and Fiat-Backed Cryptocurrencies: Risk-Based Choice for a Portfolio

by Muhammad Irfan, Mubeen Abdur Rehman, Sarah Nawazish and Yu Hao

J. Risk Financial Manag. 2023, 16(2), 99; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm16020099 - 06 Feb 2023

Cited by 2 | Viewed by 1988

Abstract

This study aims to investigate the performance and behavior of fiat- and gold-backed cryptocurrencies to support stakeholders through the preparation of a portfolio from 1 January 2021 to 30 June 2022. Moreover, while searching for a hedge or a diversifier to construct a less risky portfolio with handsome returns, the prices of fiat-backed cryptocurrencies report high fluctuation during the sample period. ARIMA-EGARCH models have been employed to examine the volatile behavior of these cryptocurrencies. The empirical results are mixed as Bitcoin has been highly volatile during the economic recession. Due to its volatility, investors seek a safe haven. Ripple, on the other hand, shows low risk compared to Bitcoin. The results further reveal that PAX gold is more volatile than PM gold, while Bitcoin, being a highly traded cryptocurrency, is significantly correlated to other cryptocurrencies. The implications of this research showing the volatility of gold- and fiat-backed cryptocurrencies are equally important to stakeholders, such as investors, and policymakers. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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14 pages, 1142 KiB

Open AccessArticle

Asymmetric Information Flow between Exchange Rate, Oil, and Gold: New Evidence from Transfer Entropy Approach

by Moinak Maiti and Parthajit Kayal

J. Risk Financial Manag. 2023, 16(1), 2; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm16010002 - 21 Dec 2022

Cited by 3 | Viewed by 1540

Abstract

The present study used transfer entropy and effective transfer entropy to examine the asymmetric information flow between exchange rates, oil, and gold. The dataset is composed of daily data covering the period of 1 January 2018 to 31 December 2021. Further, the dataset is bifurcated for analysis for before and during COVID. The bidirectional information flow is observed between EUR/USD and Oil for the whole study period unlike before COVID. However, during COVID, there was a unidirectional information flow from Oil→EUR/USD. The study finds a significant unidirectional information flow from Gold→EUR/USD. The study estimates also indicate that before COVID, the direction of information flow was from Oil→Gold. However, the direction of information flow reversed during COVID from Gold→Oil. Overall, the direction of information flow among these three variables is asymmetric. The highest transfer entropy was observed for Gold→EUR/USD among all the pairs under consideration. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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20 pages, 1612 KiB

Open AccessArticle

Do the Underlying Portfolios Matter? A Comparative Study of Equity-Linked Pay-at-Maturity Principal Protected Notes in Canada and the UK

by Yuanshun Li, Scott Anderson and Patricia A. McGraw

J. Risk Financial Manag. 2022, 15(10), 462; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15100462 - 14 Oct 2022

Viewed by 1241

Abstract

This study examines the relationship between the return and the holding cost of equity-linked pay-at-maturity principal protected notes (EL-PAM-PPNs) and the mean return and volatility of the underlying portfolio using 1568 EL-PAM-PPNs issued in the UK and Canada between 2003 and 2015. We find that: (i) the underlying portfolio’s mean return decreases the note holding cost; (ii) the underlying portfolio’s volatility increases the note return and decreases the note holding cost; (iii) investors could maximize note return and minimize holding costs by choosing EL-PAM-PPNs prudently. Investors in both countries should purchase notes with higher participation rates, where the underlying portfolio contains a higher number of stocks and lower expected volatility. UK investors should avoid callable notes and choose notes with a longer time to maturity, where payoff is determined by a single observation of the underlying portfolio’s value at maturity. Surprisingly, Canadian investors should choose callable notes and notes with a shorter time to maturity, where payoff is determined by the average of multiple observations of the underlying portfolio’s value over the life of the note. They should also look for notes that include a guaranteed positive return, and where the underlying asset has a higher dividend yield. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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27 pages, 3406 KiB

Open AccessArticle

Accuracy of European Stock Target Prices

by Joana Almeida and Raquel M. Gaspar

J. Risk Financial Manag. 2021, 14(9), 443; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14090443 - 14 Sep 2021

Cited by 3 | Viewed by 1836

Abstract

Equity studies are conducted by professionals, who also provide buy/hold/sell recommendations to investors. Nowadays, target prices determined by financial analysts are publicly available to investors, who may decide to use them for investment purposes. Studying the accuracy of such analysts’ forecasts is, thus, of paramount importance. Based upon empirical data on 50 of the biggest (larger capitalisation) European stocks over a 15-year period, from 2004 to 2019, and using a panel data approach, this is the first study looking at overall accuracy in European stock markets. We find that Bloomberg’s 12-month consensus target prices have no predictive power over future market prices. Our panel results are robust to company fixed effects and subperiod analysis. These results are in line with the (mostly US-based) evidence in the literature. Extending common practice, we perform a comparative accuracy analysis, comparing the accuracy of target prices with that of simple capitalisations of current prices. It turns out target prices are not better at forecasting than simple capitalisations. When considering individual regressions, accuracy is still very low, but it varies considerably across stocks. By also analysing the relationship between both measures—target prices and capitalised prices—we find evidence that, for some stocks, capitalised prices partially explain how target prices are determined. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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28 pages, 2999 KiB

Open AccessArticle

Financial Contagion Patterns in Individual Economic Sectors. The Day-of-the-Week Effect from the Polish, Russian and Romanian Markets

by Elena Valentina Țilică

J. Risk Financial Manag. 2021, 14(9), 442; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14090442 - 14 Sep 2021

Cited by 4 | Viewed by 1969

Abstract

This paper studies the presence of the day-of-the-week (DOW) effect in the financial contagion process observed on individual economic sectors from the Post-Communist East European markets. The only markets that provide national-specific sector indices determined throughout the 2008 financial crisis are Poland, Romania and Russia. The novel methodology combines two existing perspectives from financial literature, by employing a GJR-GARCH framework on a dummy regression model that accounts for both the crisis period and the weekdays. All indices show the presence of the DOW effect during the crisis and/or non-crisis periods, thus signaling their low level of market efficiency. However, the contagion process affects only eight of these indices: the banking, IT and oil and gas sectors from Poland, the chemical, telecommunication and transport sectors from Russia and energy sectors from Russia and Romania. All of them show signs of the DOW effect in contagion: five exhibit higher spillovers on crisis Mondays, while the other three show other weekday patterns. The findings suggest that the DOW effect is not specific to certain countries or certain economic sectors. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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16 pages, 596 KiB

Open AccessArticle

Testing the Efficiency of Globally Listed Private Equity Markets

by Lars Tegtmeier

J. Risk Financial Manag. 2021, 14(7), 313; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14070313 - 08 Jul 2021

Cited by 4 | Viewed by 2363

Abstract

This study is the first to investigate the efficient market hypothesis in its weak form and the random walk behaviour of globally listed private equity (LPE) markets represented by nine global, regional, and style indices based on weekly data covering the period from January 2004 to December 2020. Autocorrelation tests, variance ratio tests, and a non-parametric runs test are employed. The results of the autocorrelation tests and the variance ratio tests tend to correspond for all indices, and they reject the random walk hypothesis for the returns of all LPE indices under investigation. In contrast, the runs test for direct weak-form market efficiency cannot reject the null hypothesis of a random walk process for almost all LPE indices under investigation. Furthermore, there is no evidence that the market efficiency of globally listed private equity markets has improved after the global financial crisis. Due to the fact that the rapidly growing asset class of LPE as a form of private equity is still relatively unknown, the implications of the results of our paper are relevant for investors, policy makers, and academics alike. In addition, the results provide valuable insights to better understand the emerging asset class of LPE. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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22 pages, 1075 KiB

Open AccessArticle

A New Measure of Market Inefficiency

by Christopher R. Stephens, Harald A. Benink, José Luís Gordillo and Juan Pablo Pardo-Guerra

J. Risk Financial Manag. 2021, 14(6), 263; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14060263 - 10 Jun 2021

Cited by 1 | Viewed by 2657

Abstract

Financial crises, such as the Great Financial Crisis of 2007–2009 and the COVID-19 Crisis of 2020–2021, lead to high volatility in financial markets and highlight the importance of the debate on the Efficient Markets Hypothesis, a corollary of which is that in an efficient market it should not be possible to systematically make excess returns. In this paper, we discuss a new empirical measure—Excess Trading Returns—that distinguishes between market and trading returns and that can be used to measure inefficiency. We define an Inefficiency Matrix that can provide a complete, empirical characterization of the inefficiencies inherent in a market. We illustrate its use in the context of empirical data from a pair of model markets, where information asymmetries can be clearly understood, and discuss the challenges of applying it to market data from commercial exchanges. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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16 pages, 317 KiB

Open AccessArticle

IPO’s Long-Run Performance: Hot Market versus Earnings Management

by Tsai-Yin Lin, Jerry Yu and Chia-Yi Lin

J. Risk Financial Manag. 2021, 14(3), 132; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14030132 - 20 Mar 2021

Cited by 1 | Viewed by 2949

Abstract

One of the IPO-related anomalies that have been well-discussed in the finance literature is the IPO’s long-running underperformance. Two of the major explanations of that phenomenon are: “Hot market” and earnings management. This study investigates the relative importance of these two explanations to the IPO’s long-run underperformance. Our results show that although both hot market and earnings management play a role in explaining IPO’s long-run performance in their own rights, earnings management no longer exhibits significant explanatory power when the IPOs are issued in the cold market. While the IPOs that are issued in the hot market still tend to underperform in the long run even if the firms do not engage in earnings management. Our findings are consistent with the literature related to the information asymmetry in IPO market. And, because the information asymmetry is more severe in hot market condition, IPOs issued in hot market tend to exhibit poorer returns than those issued in cold market. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

17 pages, 394 KiB

Open AccessArticle

Banks’ Foreign Claims in the Aftermath of the 2008 Crisis: Institutional Response, Financial Efficiency, and Integration of Cross-Border Banking in the Euro Area

by Thierry Warin and Aleksandar Stojkov

J. Risk Financial Manag. 2021, 14(2), 61; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14020061 - 02 Feb 2021

Viewed by 2067

Abstract

Beyond financial stability as the European Banking Union’s primary objective, the European capital market integration provides an impetus for deepening bank integration and greater financial market efficiency. This article proposes an empirical framework to assess the dynamics of euro area banks’ business networking. We use banks’ foreign claims across Europe, particularly the euro area, to see how banks react to various macroeconomic signals. Banks’ foreign claims are particularly interesting due to their sensitivity. One of the main conclusions is that the euro area has seen a reallocation of capital in the aftermath of the 2008 crisis. The financial picture of Europe is different after the recent financial crisis. Although we observe a re-concentration of capital from the periphery to the core countries, we also observe some signs of recovered confidence within the European banking framework for macro-prudential reasons. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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14 pages, 274 KiB

Open AccessArticle

Reference Prices and Turnover: Evidence from Small-Capitalization Stocks

by Ashish Pandey

J. Risk Financial Manag. 2021, 14(1), 29; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14010029 - 09 Jan 2021

Viewed by 1636

Abstract

A large amount of literature in the field of social psychology and product pricing discusses the role of reference prices in affecting buyer’s price perception and purchase intention. Reference price denotes a standard against which the consumer compares the offer price of a product. In this paper, we investigate whether reference prices play any role in affecting the trading decision of stock market investors. We use firm-level, fixed-effect panel data methodology to empirically investigate whether investors respond to a violation of their internalized reference price range by executing a trading decision. Our results, based on a sample of Indian firms with small capitalization, show that investors respond to a violation of their internalized reference price range by executing a trading decision. However, consistent with the prior findings that investors suffer from myopic loss aversion, they continue to hold the positions when the reference price range is violated on the downside but sell stocks that have violated the high point of the reference price range. Our findings are robust for the reference price ranges that are constructed using the prior day’s trading prices, prior week’s trading prices, and prior year’s trading prices. The portfolio managers can develop a better understanding of expected trading intensity by incorporating reference price range in their models. The policymakers can use our results to find ways to improve the liquidity and efficiency of financial markets. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

10 pages, 217 KiB

Open AccessArticle

Inflation and Risky Investments

by Hannu Laurila and Jukka Ilomäki

J. Risk Financial Manag. 2020, 13(12), 329; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm13120329 - 21 Dec 2020

Cited by 2 | Viewed by 1689

Abstract

The paper uses a Walrasian two-period financial market model with informed and uninformed constant absolute risk averse (CARA) rational investors and noise traders. The investors allocate their initial wealth between risky assets and risk-free fiat money. The analysis concentrates on the effects of decreasing value of money, or inflation, on the rational investors’ behavior and the asset market. The main findings are the following: Inflation does not affect the informed investors’ prediction coefficient but makes that of the uninformed investors diminish. Inflation does not affect rational investors’ risk but makes the asset price more sensitive to fundament-based and sentiment-based shocks. Inflation changes the market price of the risky asset rise; while it has no effects on the informed investors’ demand of the risky asset, it does affect the uninformed investors’ demand. Finally, inflation makes the asset market more volatile. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

Other

Jump to: Research

25 pages, 3347 KiB

Open AccessSystematic Review

Portfolio Diversification, Hedge and Safe-Haven Properties in Cryptocurrency Investments and Financial Economics: A Systematic Literature Review

by José Almeida and Tiago Cruz Gonçalves

J. Risk Financial Manag. 2023, 16(1), 3; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm16010003 - 21 Dec 2022

Cited by 23 | Viewed by 5166

Abstract

Our study collected and synthetized the existing knowledge on portfolio diversification, hedge, and safe-haven properties in cryptocurrency investments. We sampled 146 studies published in journals ranked in the Association of Business Schools 2021 journals list, considering all fields of knowledge, and elaborated a systematic literature review along with a bibliometric analysis. Our results indicate a fast-growing literature evidencing cryptocurrencies’ ability to hedge against stocks, fiat currencies, geopolitical risks, and Economic Policy Uncertainty (EPU) risk; also, that cryptocurrencies present diversification and safe-haven properties; that stablecoins reveal unstable peg with the US dollar; that uncertainty is a determinant for cryptocurrency returns. Additionally, we show that investors should consider Gold, along with the European carbon market, CBOE Bitcoin futures, and crude oil to hedge against unexpected movements in the cryptocurrency market. Full article

(This article belongs to the Special Issue European Financial Market Efficiency: Investors' Behaviour, Efficient Market Hypothesis and Behavioural Finance)

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