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New Approaches to Robust Inference on Market (Non-)efficiency, Volatility Clustering and Nonlinear Dependence†

Author

Listed:
  • Rustam Ibragimov
  • Rasmus Søndergaard Pedersen
  • Anton Skrobotov
Abstract
We present novel, robust methods for inference on market (non-)efficiency, volatility clustering, and nonlinear dependence in financial return series. In contrast to existing methodology, our proposed methods are robust against nonlinear dynamics and tail-heaviness of returns. Specifically, our methods only rely on return processes being stationary and weakly dependent (mixing) with finite moments of a suitable order. This includes robustness against power-law distributions associated with nonlinear dynamic models such as GARCH and stochastic volatility. The methods are easy to implement and perform well in realistic settings. We revisit a recent study by Baltussen, van Bekkum, and Da (2019, J. Financ. Econ., 132, 26–48) on autocorrelation in major stock indexes. Using our robust methods, we document that the evidence of the presence of negative autocorrelation is weaker, compared with the conclusions of the original study.

Suggested Citation

  • Rustam Ibragimov & Rasmus Søndergaard Pedersen & Anton Skrobotov, 2024. "New Approaches to Robust Inference on Market (Non-)efficiency, Volatility Clustering and Nonlinear Dependence†," Journal of Financial Econometrics, Oxford University Press, vol. 22(4), pages 1075-1097.
    • Handle: RePEc:oup:jfinec:v:22:y:2024:i:4:p:1075-1097.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbad020
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    More about this item

    Keywords

    GARCH; market efficiency; nonlinear dependence; robust inference; t-test; volatility clustering;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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