Impact of the Crises on the Efficiency of the Financial Market: Evidence from the SDM

By Bachar Fakhry


The efficient market hypothesis has been around since 1962, the theory based on a simple rule that states the price of any asset must fully reflect all available information. Yet there is empirical evidence suggesting that markets are too volatile to be efficient. In essence, this evidence seems to suggest that the reaction of the market participants to the information or events that is the crucial factor, rather than the actual information. This highlights the need to include the behavioural finance theory in the pricing of assets. Essentially, the research aims to analyse the efficiency of six key sovereign debt markets during a period of changing volatility including the recent global financial and sovereign debt crises. We analyse the markets in the pre-crisis period and during the financial and sovereign debt crises to determine the impact of the crises on the efficiency of these financial markets. We use two GARCH-based variance bound tests to test the null hypothesis of the market being too volatile to be efficient. Proposing a GJR-GARCH variant of the variance bound test to account for variation in the asymmetrical effect. This leads to an analysis of the changing behaviour of price volatility to identify what makes the market efficient or inefficient. In general, our EMH tests resulted in mixed results, hinting at the acceptance of the null hypothesis of the market being too volatile to be efficient. However, interestingly a number of 2017 observations under both models seem to be hinting at the rejection of the null hypothesis. Furthermore, our proposed GJR-GARCH variant of the variance bound test seems to be more likely to accept the EMH than the GARCH variant of the test.


  1. Introduction

1.1. Objectives

1.2. Contributions to the Literature

1.3. A Brief Review of the Main Conclusions

1.4. Structure of the Book


  1. Literature Review

2.1. The Efficient Market Hypothesis

2.1.1. The Microeconomics Behavioural Theories

2.1.2. Review of the Efficient Market Hypothesis

2.1.3. A Review of the Tests of the Efficient Market Hypothesis

2.1.4. Concluding Review

2.2. The Theory of Behavioural Finance: An Alternative Theory

2.2.1. A Brief Overview of Behavioural Finance Theory

2.2.2. The Overreaction Hypothesis

2.2.3. A Review of the Effects of Rational Bubbles

2.2.4. Concluding Review

2.3. The Review of Economic Policies

2.3.1. The Macroeconomic Arguments Influencing the Monetary Policy

2.3.2. The Macroeconomics Argument Influencing the Fiscal Policy

2.3.3. Concluding Review

2.4. Review of the Models of Volatility

2.4.1. The use of the GARCH Family in the Sovereign Debt Market

2.4.2. The use of the MV-GARCH Family in the Sovereign Debt Market

2.4.3. A Review of the Markov Regime-Switching ARCH Models

2.4.4. Concluding review


  1. Methodology

3.1. Model Specification for the Variance bound test

3.2. Model Specifications for the Univariate GARCH Models

3.3. Model Specifications for Markov Switching ARCH


  1. Empirical Evidence

4.1. Data Definition

4.2. Statistical Analysis and Tests

4.2.1. Analysis of the Price

4.2.2. Test for Normality

4.2.3. Test for Structural Breaks

4.2.4. Variance Ratio Test of the Random Walk Model

4.2.5. Stationarity Tests

4.3. Testing the Sovereign Debt Market for the Efficient Market Hypothesis

4.3.1. Volatility Test of the EMH using GARCH

4.3.2. An Alternative Volatility Test of the EMH using GJR-GARCH

4.3.3. Concluding Review

4.4. The Behaviour of Price Volatility in the Sovereign Debt Market

4.4.1. The GARCH Model of Price Volatility

4.4.2. The EGARCH-m Model of Volatility

4.4.3. The SWARCH Model of Volatility Switching

4.4.4. Concluding Review


  1. Conclusions

5.1. A Review of the Research Objectives

5.2. A Summary ofthe Findings

5.3. A Review of the Limitations

5.4. A Review of Recent Developments

5.5. A Review of Possible Future Research

5.6. Reflective Statement




About Author

Professor Bachar Fakhry was born with a disability effecting his speech and hand movement. Nevertheless, he is currentlyan Assistant Professor of Research at the University of Lahore, School of Accountancy & Finance. He received his PhD in Economics from the University of Bedfordshire in 2015.His research is mainly in the areas of financial economics and econometrics with a special focussed on bounded rationality; conversely, he has authored and co-authored several papers on bounded rationality in the financial market. He, also, has two master degrees in Distributed Information Systems (1996) and Financial Management (2005), both from the University of East London. Previously, he has worked for IBM as a software engineer and Goldman Sachs as a junior economist.



Date of Publication

July 15, 2018

File Size: 5256 KB
Length: xiii + 262 pages

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