Efficiency of the financial markets during the COVID-19 crisis: Time-varying parameters of fractional stable dynamics

Highlights

• A fractional stable process with time-varying parameters is estimated.

• Selection of the free parameters leading to the best forecast of distribution.

• An indicator of market efficiency is proposed and compared to a Hurst exponent.

• Application to stock price series during the COVID-19 crisis.

Abstract

This paper investigates the impact of COVID-19 on financial markets. It focuses on the evolution of the market efficiency, using two efficiency indicators: the Hurst exponent and the memory parameter of a fractional Lévy-stable motion. The second approach combines, in the same model of dynamic, an alpha-stable distribution and a dependence structure between price returns. We provide a dynamic estimation method for the two efficiency indicators. This method introduces a free parameter, the discount factor, which we select so as to get the best alpha-stable density forecasts for observed price returns. The application to stock indices during the COVID-19 crisis shows a strong loss of efficiency for US indices. On the opposite, Asian and Australian indices seem less affected and the inefficiency of these markets during the COVID-19 crisis is even questionable.