Relative efficiency of equity ETFs: an adaptive market hypothesis perspective

ABSTRACT

In light of the growing prominence of passive investment schemes in general and Exchange Traded Funds (ETFs) in particular, this study examines the relative efficiency of domestic equity index ETFs across the globe from an Adaptive Market Hypothesis perspective. To be specific, we examine the relative efficiency of equity ETFs pertaining to Australia, Canada, China, Eurozone, France, Germany, India, Japan, UK and USA. We do so by employing rolling estimations of inherent long memory in these financial time series. Our findings indicate the presence of episodic long memory or anti-persistence in the first and second moments of these ETFs and their underlying indices. Put differently, the efficiency of ETFs and their underlying indices were found to be dynamic in nature. While our findings lend credence to Adaptive Market Hypothesis, they also (a) pinpoint the need for policy prescriptions geared towards diversifying investor base, and (b) call into question the past assertions that markets are becoming more efficient over time.

KEYWORDS:

• Long memory
• exchange traded funds
• relative efficiency
• adaptive market hypothesis

JEL CLASSIFICATION:

• C58
• G14
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ AMH provides an intellectual framework to reconcile the opposing perspectives held by proponents of EMH and its opponents (Lo 2012).

² Rolling estimations are in line with AMH, for they offer a gateway to capture the evolving efficiency of asset prices over time.

³ End of 2007–2008 Recession (https://www.nber.org/cycles/)

⁴ In the interest of brevity, rolling Hurst exponent plots pertaining to other countries are not shown. Interested readers may approach the author(s) for the same.