Analysis of stock market efficiency during crisis periods in the US stock market: Differences between the global financial crisis and COVID-19 pandemic

• Published in: Physica A Vol. 574; p. 125988
• Main Author: Choi, Sun-Yong
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 15.07.2021
• Subjects: COVID-19 pandemic; Efficient market hypothesis; Global financial crisis; MF-DFA; COVID-19 pandemic; Efficient market hypothesis; MF-DFA; Global financial crisis
• ISSN: 0378-4371; 1873-2119
• DOI: 10.1016/j.physa.2021.125988

In this study, we test the efficient market hypothesis for a number of sectors in the US stock market during the COVID-19 pandemic to identify its effects on individual sectors. To test this hypothesis, we define the average price for 11 sectors within the S&P 500 and apply multifractal detrended fluctuation analysis to the average return series. Furthermore, we also investigate these sectors’ efficiency and multifractality during the global financial crisis (GFC) to analyze the features of the COVID-19 pandemic. Our findings can be summarized as follows. First, the average return series show non-persistent and persistent features during the GFC and the COVID-19 pandemic, respectively. Second, during each of these crisis periods, the consumer discretionary and utilities sectors had the highest and lowest levels of efficiency, respectively. Third, while both long-range correlations and fat-tailed distribution contributed to the multifractal properties, the latter of these was the chief contributor. Furthermore, the lower the efficiency ranking, the greater the impact of the fat-tailed distribution on multifractality. Finally, we classify sectors with low market efficiency for the two crisis periods. These findings have several important implications for asset allocations by investors in US stock markets. •We test the EMH for a number of industries in the US stock market during COVID-19.•We also investigate their efficiency and multifractality during the GFC.•The CD and UTI sectors have the highest and lowest efficiency, respectively.•The fat-tailed distribution had a greater impact than on the long-range correlation.•We classify sectors with low market efficiency for the two crisis periods.