Efficiency of Financial Markets During Crisis Periods: Fractal Analysis Approach

This study is devoted to the problem of financial markets' efficiency during crisis periods. Efficiency of financial markets can be defined as the degree to which prices reflect available information. If market is efficient, prices reflect all the available information and assets always trade at their fair value. In statistical terms it means that price changes follow the Random Walk process. Standard tests of Random Walk are not able to detect long memory in time series, however it is an important violation of efficiency. Fractal analysis presents a measure for detection of long memory – Hurts exponent. In this study different methods of Hurst exponent estimation are considered, and then applied to Russian financial market in order to test two hypothesis: (1) markets are less efficient during crises than during tranquil periods; (2) dynamics of Hurst exponent can predict the upcoming crisis by a decreasing trend just before it. The results show, that there is evidence for both of these two hypothesis, however the behaviour of Hurst exponent depends on the nature and causes of the crisis, so that it is difficult to make exact predictions about future crisis.