Are European Equity Style Indices Efficient?: An Empirical Quest in Three Essays
Many situations in the history of the stock markets indicate that assets are not always efficiently priced. But why does it matter whether the stock market is efficiently priced? Because "well-functioning financial markets are a key factor to high economic growth." (Mishkin and Eakins, 2006, pp. 3-4) In three essays, this dissertation sheds additional light on the topic of market efficiency, which is far from being resolved. Since European equity markets have increased in importance globally, the author, instead of focusing on U.S. markets, looks at a unified European equity market. By randomly testing equity prices, revisiting Shiller's claim of excess volatility through the means of a vector error correction model, and modifying the Gordon-Growth-Model, the book concludes that a small degree of inefficiency cannot be ruled out. While usually European equity markets are pricing assets correctly, some periods (e.g. the late 1990s and early 2000s) show clear signs of mispricing. The hypothesis of a world with two states â?? regime one, a normal efficient state; regime two, a state in which markets are more momentum driven â?? presents a possible explanation.
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Systematic mispricing in European equity prices?
Theoretical and empirical implications