Journal of Quantitative Economics (2022) 20:337–377

https://doi.org/10.1007/s40953-022-00295-x

ORIGINAL ARTICLE

An Entropy Approach to Measure the Dynamic Stock

Market Efficiency

Subhamitra Patra1 · Gourishankar S. Hiremath2

Accepted: 14 March 2022 / Published online: 6 May 2022

© The Author(s), under exclusive licence to The Indian Econometric Society 2022

Abstract
We measure stock market efficiency by drawing the comprehensive sample from
Asia, Europe, Africa, North–South America, and Pacific Ocean regions and rank the
cross-regional stock markets according to their level of informational efficiency. The
study period spans from January 1, 1994, to August 3, 2017. We employ the approx-
imate entropy approach and find that stock market efficiency evolves over the period.
The degree and nature of evolution vary across regions and the development stage
of the markets. The global, regional, domestic economic, and non-economic factors
influence the adaptive nature of the stock markets. The emerging stock markets have
improved efficiency by financial liberalization policy but are adversely affected by
global shocks. The estimates validate the relevance of the adaptive market frame-
work to describe the rejection of random walk without excess returns. The results
suggest the growing presence of technical analysis and active portfolio managers.
The emerging markets in Asia hold policy lessons for their peers. The findings sug-
gest that global investors need to overcome the homogeneity bias as returns opportu-
nities exist within the region and types of markets.

Keywords EMH · Entropy · AMH · Adaptive markets · Financial crises · Portfolio

management

JEL Classification G14 · G4 · G10 · G01

* Gourishankar S. Hiremath
[email protected]
1
VIT Business School, Vellore Institute of Technology, Chennai, India
2
Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur,
Kharagpur, India

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338 Journal of Quantitative Economics (2022) 20:337–377

Introduction

Informationally efficient markets are indispensable for the efficient allocation of cap-
ital, investment, risk & portfolio management decisions. Ostensibly, a large volume
of research tests the efficient market hypothesis (EMH), but conclusive evidence
is elusive.1 The assertion of EMH as dated research is a blindside view, whereas
the need is to examine it as a dynamic system. We need to view informational effi-
ciency as a dynamic mechanism, whereas empirical research on EMH confines it
to a static theory. The rejection of random walk does not necessarily imply profit-
ability (Canarella et al. 2013), nor markets are efficient over the period (Campbell
et al. 1997). Instead, informational efficiency is relative and possibly varies over
the period and across the markets. Several factors, including financial liberaliza-
tion, domestic macroeconomic policy, accounting standards, market regulations, tax
structure, and political environment, among others, influence the efficiency of mar-
kets (Rejeb and Boughrara 2013; Hooy and Lim 2013; Stoian and Iorgulescu 2020;
Lin et al. 2021; Liu and Li 2021; Galvani and Ackman 2021). The previous research
on testing of stock market efficiency hardly captures these changes.
Moreover, underdeveloped markets have been continuously pursuing capital mar-
ket reforms to improve the informational efficiency of markets. These reforms are
self-defeating when empirical research confines to conclude markets as either effi-
cient or inefficient over the period. The role of financial innovations in making the
market complete is ruled out in such a static framework. The microstructure reforms
and automation significantly changed the market structure, competition, and trad-
ing environment. These changes affect the behavior of investors and, eventually, the
returns (Hasbrouck 2007). Financial analysts need to recognize the existence of new
paradigms and go beyond trading on the information (O’Hara 2014).
Therefore, the previous research is not only less relevant for trading strategies or
regulation but hardly explains the nuances of the markets and the presence of techni-
cal analysts and active portfolio managers in the industry (Brown 2020). The weak
form of efficiency demands a new empirical investigation in a dynamic system. In
this light, we attempt to measure the level of informational efficiency over the period
and across the markets. We also investigate the factors influencing the evolution of
markets in developed and emerging economies. We offer intriguing insights into the
working of markets and trading strategies. The analysis also suggests measures for
the better functioning of the markets.
Informational efficiency is critical for investors to access complete and accurate
information from the market. In an informationally efficient market, asset returns
reflect all available information instantaneously and correctly. Such a mechanism
rules out arbitrage opportunities and leaves no scope for excess returns (Fama
1970). In an informationally efficient stock market, active portfolio management
is futile, whereas a simple strategy of buying and holding diversified securities is
enough in such markets. Nevertheless, the increasing importance of active portfolio

1
For a detailed review on testing efficiency, see, Lo (2017).

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Journal of Quantitative Economics (2022) 20:337–377 339

management and high-frequency trading combined with algorithmic trading speaks

otherwise. Our research deciphers the dynamism of the markets and empirically
attempts to reconcile the presence of active portfolio management and EMH.
We contribute to the extant literature in several ways. We measure the degree
of stock market efficiency in a weak form and examine whether the degree of effi-
ciency is time-varying following unique approaches. We focus on the evolution of
stock market efficiency over the years across the globe. A sizeable number of stud-
ies document episodes of stock market efficiency (e.g., Cajueiro and Tabak 2005;
Ito and Sugiyama 2009; Charfeddine and Khediri 2016; Charfeddine et al. 2018).
These studies reject or validate EMH during a particular period. These studies focus
on fixed windows. Besides, the pertinent literature ignores the varied characteristics
of the markets and does not capture time-varying complexities. The inferences from
such analyses are seldom helpful in understanding the evolution of the markets, par-
ticularly the EMs across the regions.
Moreover, the extant evidence on the developed markets (DMs). The literature on
the comparative analysis between DMs and EMs across the regions over 3 decades
is not available. Also, the previous work hardly explains the implications of time-
varying efficiency for trading, which makes the present analysis unique. Besides, the
previous evidence on episodic efficiency was sensitive to the chosen window size.2
The analysis of market efficiency in a single rolling window framework is biased
to capture the market dynamism in different periods (Alvarez-Ramirez et al. 2012;
Verheyden et al. 2015). We assess the cross-regional market efficiency in the alter-
native rolling window lengths and find the change in the market dynamics as per the
change in the window size. The findings of our study suggest that investors need to
exploit the price pattern in different possible time windows before investing in any
particular market to ensure effectiveness of trading strategies as profitable opportu-
nities are limited to very brief periods.
Further, we employ the approximate entropy approach to assess the level of
time-varying efficiency, which has seldom been explored before. In the past, several
methods, such as autocorrelation tests, unit root tests, and a battery of linear & non-
linear approaches, were applied to examine the weak form of efficiency. However,
these methods fall short in measuring the degree of market efficiency. At best, these
approaches reject or accept the null of the random walk hypothesis (RWH). There-
fore, our definition of stock market efficiency is based on the degree of complexi-
ties in the patterns contained in a random sequence of price changes.3 The approxi-
mate entropy allows us to measure the degree of randomness and predictability.
The entropy method is efficient in the presence of noise and possesses better power
properties. Wang et al. (2012) and Alvarez-Ramirez et al. (2012) utilize the entropy
approach to probe foreign exchange markets and the US stock market, respectively.
The research deciphering the varying degree of complexities in the stock returns of
diversified market conditions is unavailable.

2
For a detailed survey, see, Hiremath (2014).
3
Theodore (1996) considers such exploitable patterns of the price changes as the primary practice of
market practitioners.

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340 Journal of Quantitative Economics (2022) 20:337–377

Departing from the previous research, we measure the degree of stock market
efficiency across the regions and types of markets. A disaggregated analysis of
informational efficiency provides a captivating understanding of the working of mar-
ket forces in various regions and allows a meaningful comparison. Unlike previous
work, we rank the stock markets across the region and type of markets based on
diversities in their price patterns. We also follow a cluster approach to ensure the
robustness of our inferences.
Further, an inquiry into the influence of the economic and non-economic factors
on the evolution of the stock market efficiency over 3 decades fills an essential gap
in the pertinent literature. We develop an adaptive market framework to examine
the time-varying efficiency. AMH research remains in infancy despite its theoretical
importance (see, Hiremath and Kumari 2014). The pertinent studies employ con-
ventional tests and do not measure the degree of efficiency. The markets with the
institutional, regional, and developmental heterogeneity are under-researched, which
primarily motivates us to assess AMH. Our research significantly extends the litera-
ture on efficiency, liberalization, and emerging markets (EMs).
In this empirical research, we find a varying level of efficiency across the mar-
kets. We find the European stock markets as the most efficient, whereas the eco-
nomic reforms and investment in market infrastructure significantly improved the
degree of efficiency in EMs. We show the influence of several factors, including
economic and non-economic events, on the evolution of stock market efficiency. Our
analysis offers insights into capital market development plans.
The rest of the paper is organized into the following sections: “Theoretical
underpinnings and empirical methods" discusses the conceptual framework and the
entropy method. “Empirical results" presents discussion and implications of results.
The final section concludes the paper.

Theoretical Underpinnings and Empirical Methods

We develop an adaptive market framework to examine the time varying efficiency

and identify the factors influencing the evolution of the markets. Our entropy
approach captures the complexities of the data generating process, which explains
the conundrum of contradictory evidence on stock market efficiency.

Conceptual Framework and Related Research

The testing of market efficiency often misleads the investors from the actual infer-
ences of the market due to its inability to capture the dynamic information environ-
ment. The stock market efficiency cannot be static over the period due to several
institutional and regulatory changes and financial innovation. In addition, several
events also influence the information and its analysis both positively and adversely.
Hence, Campbell et al. (1997) emphasize the relative efficiency of stock markets.

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Journal of Quantitative Economics (2022) 20:337–377 341

Various studies examine such relative efficiency in several markets (Zalewska-

Mitura and Hall 1999; Griffin et al. 2009; Ito and Sugiyama 2009; Hiremath and
Kamaiah, 2010) by testing the RWH. The research on time-varying efficiency pri-
marily focused on developed markets (DMs) and offered little on EMs except con-
cluding them as inefficient (Hiremath 2014). The research on relative efficiency
also lacks a rigorous conceptual framework. Moreover, the essence of time-varying
efficiency remained controversial due to the divergent views from neoclassical and
behavioral schools on the nature of efficiency.
Against this backdrop, the adaptive market hypothesis (AMH) of Lo (2004) offers
a theoretical foundation to dynamism in informational efficiency. Under AMH, the
market evolves over the period. The market behaves as an evolutionary system in
which the market participants are motivated by bounded rationality. In this con-
text, AMH explains dynamism in informational efficiency – deviation of the secu-
rity prices from the equilibrium. The extent of information incorporation in adap-
tive markets depends on the market environment and the nature of the participants.
Non-synchronous trading, high transaction costs, poor accounting standards, lack
of disclosure norms, and poor corporate governance are the characteristics of EMs.
The EMH, which assumes a frictionless market, hardly captures the intricacies of
information aggregation in EMs. The AMH accommodates all the market frictions,
including behavioral biases. Thus, AMH depicts a realistic picture of the markets,
and the framework is relevant to understanding the trading inferences.
Despite the fierce debate, no consensus on the behavior of the financial market and
portfolio management is reached (Lo 2005). Although the literature on behavioral biases
successfully explains the market anomalies and role of beliefs, biases, and investors’ sen-
timent, an alternative framework that convincingly reasons the empirical puzzle of the
unpredictability of returns despite deviation of asset returns from the EMH is lacking.
Lo (2005) uses an evolutionary approach of Farmer and Lo (1999) and Farmer (2002)
to study interactions in financial markets and asserts that ‘dynamics of evolution, i.e.,
competition, mutation, reproduction, and natural selection determine the efficiency of
markets. In AMH, the market is like a biological environment; various kinds of inves-
tor groups are distinct species. The interaction of such species with the environment (or
ecology) determines the degree of information that eventually reflects in prices. The
profit opportunities are similar to that of food and water in ecology. The availability and
magnitude of these opportunities dictate the level of competition in the market. Hence,
the profits and losses are subject to the market conditions and the number of entry and
exit of investors. The successful traders survive in the market, whereas unsuccessful
traders eventually extinct (exit) after losses beyond the bearable point. Thus, the survival
of the richest and the law of natural selection determines the market’s evolution. In an
adaptive market, fit and adaptable are relevant than rationality and biases.
In liberalized economies, the continuous occurrences of the dynamic economic
events, changes in the market microstructure, uncertain behavior of the market par-
ticipants, and costly information infuse dynamism in the market environment. The
changing information situation drives away the asset prices from the random-walk
benchmark and allows the market dynamics to adapt optimally. Accordingly, the
level of stock market efficiency varies over time and across the region based on its
adaptability to dynamic economic situations, which motivates us to use AMH as an

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342 Journal of Quantitative Economics (2022) 20:337–377

underlying theory in assessing the pricing part of informational efficiency across the
regions over 3 decades. Further, the adaptability of the domestic stock market not
only depends on the domestic but also on the external factors in a globalizing world.
Underdeveloped economies have been introducing economic and microstructure
reforms to improve the quality of the financial markets. Our conceptual framework
allows us to capture these changes and explain their influence on the evolution of
developing markets.
The evolutionary perspective of market efficiency does not necessarily imply
the random-walk stock returns. Moreover, the static all-or-nothing market condi-
tion remains invalid in an efficient market under the adaptive framework. Therefore,
the combined analysis of the dynamic price patterns and adaptability of agents to
the changing economic and non-economic environments provide a base for measur-
ing stock market efficiency under AMH. From a macroscopic viewpoint, approxi-
mate entropy efficiently deals with diversities and variations in the price patterns
exhibited by the market under a dynamic information environment. The method fur-
ther possesses better power properties to deal with the financial noise (Pincus and
Kalman 2004). In this aspect, our estimation of the approximate entropy approach
in a rolling window framework and analysis of the cross-regional factors associated
with each entropic variation of the markets provides a better assessment of the infor-
mational efficiency under the adaptive market framework. Accordingly, our defini-
tion of informational efficiency is based on the degree of time-varying complexities
in the patterns in a random sequence of price changes, which provides an efficient
estimate for AMH across the regions. The properties of approximate entropy effi-
ciently capture the complexities of the stock returns, and hence a composite index
of various methods is not appropriate to address the current research problem. The
AMH discusses the complexities of the evolving market system, and hence the
investors often do not beat the market despite the presence of excess returns. The
approximate entropy is appropriate to capture these complexities.

Model Specifications and Data

We employ the approximate entropy (APEn) proposed by Pincus (1991) and Pin-
cus and Kalman (2004) to assess the extent of randomness in the returns series (rt).
APEn calculates the likelihood of rt series with m dimension that remains similar on
the next incremental (i.e., m + 1) dimensions and investigates the regularity of the rt
series. In finance, APEn has the advantage of measuring financial market efficiency
by analyzing the diverse patterns and statistical variations of the return (rt ) series at
a finite length. Therefore, APEn is one of the best measures to assess market ran-
domness (Pincus and Kalman 2004). Various methods, such as linear serial correla-
tion analysis, unit-root tests, variance ratio tests, state-space estimates, and Hurst
exponents, were employed in the previous work to examine the random-walk prop-
erties of the financial time series.4 Nevertheless, these tests do not possess statistical

4
For a discussion on various methods to test efficiency, see Hiremath (2014).

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Journal of Quantitative Economics (2022) 20:337–377 343

power properties when the underlying data series is noisy. Also, these methods are
inefficient in capturing the complexities of high-dimensional systems.
The entropy methods possess better statistical power properties to quantify the
complexities in stock price patterns and efficiently capture the market irregularity
due to new information processing (Gulko 1999). Besides, the entropy also identi-
fies the nonlinear dependence in the series (Darbellay and Wuertz 2000). Since the
seminal work of Clausius (1865), several entropy methods such as Shannon entropy
(Shannon 1948), relative entropy (Kullback and Leibler 1951), Kolmogorov com-
plexities (Kolmogorov 1968), E-R entropy (Eckmann and Ruella 1985), and Permu-
tation entropy (Bandt and Pompe 2002) are developed to examine the complexities
of the time-series data.
Unlike the traditional entropy approaches, which are biased in examining the
system noise, the APEn approach efficiently deals with the noise by making data
comparisons possible on a larger scale. APEn has an advantage over other methods
in examining the time-varying complexities of the system as it computes the statisti-
cal variations of rt at a finite length. Therefore, APEn is the indicator of financial
market stability (Pincus and Kalman 2004). Another unique strength of APEn lies
in its ability to distinguish different systems, namely high and low dimensional cha-
otic systems, periodic and multi-periodic systems, a hybrid and stochastic system
with a simple algorithm. This ability ensures the robustness of the inferences (Sleigh
and Donovan, 1999). APEn also computes the irregularity of less-frequently ana-
lyzed systems with the correlated and non-identically distributed random variables
in an unbiased manner (Pincus 1991). Given these unique advantages, we choose
APEn to examine the stock market complexities with 500 random sequences across
the regions. Therefore, our findings on the behavior of stock returns are unique and
robust.
For a given stochastic variable (rt), the time series (Ts) with length N takes the fol-
lowing form:
{ } { }
ri = r1 , r2 , r3 , … , rN (1)

In Eq. (1), length N is related to a time scale 𝜏 = N Ts. For a given Ts with N obser-
vations, we set the APEn algorithm with the two specified parameters: embedding
dimension (m) and tolerance level (r). The former represents the length of a pattern,
whereas the latter explains tolerance for the similarity between the patterns. Hence,
we set m = 2 and r = 0.15 in the APEn estimation for finite data length of N = 6154.5
Therefore, we create two m-dimensional sequence vectors [i.e. X m(i), X m(j)] in the
first step.

5
Our selection of m and r is consistent with the literature. According to Yentes et al. (2013), APEn
increases the self-matches with the increase in data length, and such self-matching bias can only be con-
trolled with m = 2 and r ≥ 0.15. They argue that the value of entropy is stabilized with greater N. The
minimum threshold for N must be greater than 200 data points. Lu et al. (2008) document that smaller
r leads to the few self-matches due to low-pass filter. APEn estimation with 0.15 tolerance level is not
biased by the increase or decrease in self-matches in the Ts series. The estimates of the entropy with 0.1
and 0.2 tolerance levels are not reported in to save the space.

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344 Journal of Quantitative Economics (2022) 20:337–377

{ }
Xm (i) = ri , ri+1 , ri+2 , … , ri+m−1 (2.1)

{ }
Xm (j) = rj , rj+1 , rj+2 , … , rj+m−1 , (2.2)

where i ≠ j and 1 ≤ i and j ≤ N−m + 1.

In the second step, we compute the distance between the two vectors by calculat-
ing the absolute difference between their respective scalar components as follows:
d[Xm (i), Xm (j)] = max {|x(i + k) − x(j + k)|}, (3)
k=0,…,m−1

where 0 ≤ k ≤ m−1.
The distance between the respective scalar components calculates the match
between X m(i) and X m(j). The two embedded vectors remain similar if the distance
between their respective scalar components (Eq. 3) is smaller than r. In step 3, we
calculate the probability of the data point of X m(j) that exists within the tolerance
level of X m(i) for each observation, 1 ≤ i ≤ N − m + 1. In other words, if the number
of data points [cmi
(r)] of X m(j) series is similar to that of the X m(i) series, the relative
frequency to find a vector, X m(j) within the tolerance level (r) of X m(i) is obtained as
dm
i (r)
cm
i (r) =
, (4)
N−m+1
where cmi
(r) reflects the extent of the gap between the two vectors:
d [ Xm(i), Xm(j)]≤ r, and 1 ≤ j ≤ N- m.
Kristoufek and Vosvrda (2014) document cm i
(r) as the measure of autocorrelation
due to assessing the maximum distance between the lagged series. Next, we com-
pute the average of natural logarithm of each cm i
(r) during the i as follows:
N−m+1
1 ∑
�m (r) = ln[cm
i (r)] (5)
N − m + 1 i=1

We extend the embedding dimension to m + 1, which takes the following form,

and then compute the logarithmic average relative frequency of X m+1(j) that remains
similar to that of X m+1(i) series within the tolerance level.
N−m−1
1 ∑ [ ]
�m+1 (r) = ln cm+1
i
(r) (6)
N − m i=1

Both the relative average frequency, ∅m(r) and �m+1(r) reflects the extent of simi-
larity between Xi and Xj patterns within the specified tolerance level at different time
dimensions (i.e., m and m + 1). Finally, we calculate the APEn for the financial time
series by analyzing the relative magnitude between the repeated patterns as follows:

APEn (m, r, N) = �m+1 (r) − �m+1 (r) (7)

The value of APEn (m, r, N) ranges between 0 and 2; 0 indicates the perfectly
deterministic time series, and 2 denotes the presence of complete randomness of

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Journal of Quantitative Economics (2022) 20:337–377 345

the series. Therefore, the value of APEn around 0 suggests a perfectly repeatable
pattern of returns with less complexity in the return series. Such patterns are thus
predictable and allow the market participants to obtain abnormal profits. The value
of APEn closer to 2 indicates a higher degree of irregularity in the financial markets,
and thus the stock returns are unpredictable. In other words, the return series follows
a random walk. Therefore, the computed entropy is a strong indicator of informa-
tional efficiency; higher entropy suggests the presence of a greater extent of random-
ness in the market returns and thereby a higher level of informational efficiency and
vice versa.
The extent of market randomness varies from one stock market to other, which
needs a better articulation of diversified features of informational efficiency. Further,
the geographical discrepancies and diversified market structure may affect the char-
acteristics of the market efficiency. Institutional investors have developed over the
years several region-specific funds. The investors also perceive regions as homog-
enous entities in their investment decisions (Divecha et al. 1992; Kaminsky et al.
2001; Goyal 2016; Hiremath 2018). In this context, we carry out the k-means cluster
analysis to capture the differences in the degree of informational efficiency in the
entire sample as well as within each regional sub-sample. The region is not a cluster,
but the cluster is that of efficient and inefficient markets. Such an analysis overcomes
the bias of homogeneity among investors. This efficient formal inference procedure
ensures the robustness of our findings:
∑
Ck = (xi − 𝜇k )2
(8)
xi ∈ck

where Ck represents the k-mean clusters of the given series. We calculate Ck as the
sum of squared distances between the data points ( xi ) and the clustered centers or
centroid (𝜇k ). Hence, we apply three alternative algorithms – Elbow (Bholowalia
& Kumar, 2014), Silhouette (Thinsungnoen et al. 2015), and Gap (Tibshirani et al.
2001) statistics to obtain the appropriate 𝜇k . We define the robust value of 𝜇k as 2
based on all the methods (Fig. 10).
We collect the daily closing index prices of 87 stock markets from the Bloomb-
erg Terminal from January 1, 1994, to August 3, 2017.6 The sample consists of 45
DMs and 42 EMs. The stock indices of each market consist of broad-based stocks.
The index is considered as the representative index of each market. We calculate
the logarithmic returns of stock indices to normalize the returns to avoid artifacts in
estimating entropy values due to the sudden changes in stock prices. The formula for
calculating stock returns (rt ) is as follows:
( )
pt
rt = ln × 100 (9)
pt−1

where pt and pt−1 represent the current and past closing stock prices.

6
The begining date of a few indices varies based on the availability of the data.

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346 Journal of Quantitative Economics (2022) 20:337–377

The descriptive statistics presented in Table 2 show that average returns of the
markets are positive except Kuwait, Greece, Indonesia, Palestine, Serbia, Bosnia &
Herzegovina, Ukraine, Kenya, Mexico, Argentina, Venezuela, Egypt, Turkey, Bang-
ladesh, and Costa Rica. The skewness of the returns across the markets is mixed,
whereas the Kurtosis statistics indicate a leptokurtic peak. Further, the significant
Jarque–Bera test confirms the non-normal distribution of the stock returns series,
whereas the unit-root test confirms the stationarity of the data series.

Empirical Results

We estimate the APEn for the full sample and discuss the estimates. We also present
a region-wise cluster analysis to decipher the relative efficiency across the geograph-
ical regions and types of markets. We also estimate the APEn in a rolling window
to show the time-varying efficiency and explain the evolution of markets using the
adaptive market framework.

Full‑Sample Analysis

We quantify the degree of randomness in the stock return series and rank the stock
markets as per the level of absolute market efficiency (Table 1). Hence, our calcu-
lated APEn estimates act as the proxy for the absolute informational efficiency of
the respective markets. The methods applied in the extant literature assume noise-
less data and thus fall short of examining complex patterns of high-dimensional sys-
tems. Mensi (2012) ranks the emerging stock markets based on Shannon entropy
which produces biased estimates in the presence of the system noise and hence can-
not effectively capture the AMH characteristics such as regional diversity, institu-
tional heterogeneity, and diversified market conditions. Kristoufek and Vosvrda
(2013, 2014) and Baciu (2014) employ the composite efficiency indices constructed
by combining multiple methods such as long-range dependence, fractal dimen-
sions, and entropy. APEn approach efficiently ranks the markets in the presence
of financial noise and complexities. Hence, this approach is suitable to address the
current research problem. APEn has an advantage over other methods in examin-
ing the time-varying patterns of the price complexities and, therefore, is considered
an efficient indicator of financial market stability (Pincus and Kalman 2004). The
approach further ensures the robustness of inferences (Sleigh and Donovan, 1999),
which motivates us to rank the cross-regional stock markets solely based on their
level of APEn estimates.
Note: The table presents entropy values for each market computed for the full
sample period. The markets with entropy values closer to 2 are highly efficient as
returns exhibit a higher degree of complexities, whereas the entropy around zero
indicates the predictability.
Japan is the most informationally efficient market, followed by Switzerland and
Australia (Table 1). The unique and epoch-making financial market reforms such as
the introduction of the off-hour trading system in 1997, implementation of the big

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Journal of Quantitative Economics (2022) 20:337–377 347

Table 1  Ranking of the stock markets

Country Index APEn Ranking Country Index APEn Ranking

Japan TPX 2.071 1 Colombia IGBC 1.877 45

Switzerland SMI 2.055 2 SK KOSPI 1.871 46
Australia ASX 2.054 3 Serbia BELEXLIN 1.869 47
Chile IPSA 2.047 4 Tunisia TUSISE 1.849 48
Brazil BVSP60 2.038 5 Croatia CRO 1.848 49
Spain IBEX35 2.034 6 Russia MCX 1.836 50
Portugal PSI-20 2.033 7 Jamaica JMSMX 1.835 51
Poland WIG20 2.032 8 B&H SASX10 1.819 52
France CAC40 2.031 9 Bahrein BB 1.801 53
Sweden OMXS30 2.029 10 Sri Lanka CSE 1.798 54
Germany DAX 2.029 11 Macedonia MBI 1.771 55
Denmark OMXC20 2.027 12 Kenya KNSMIDX 1.762 56
UK FTSE100 2.022 13 Slovakia SKSM 1.761 57
South Africa FTSE/JSE 2.017 14 UAE ADSMI 1.751 58
India Nifty50 2.007 15 Indonesia JKSE 1.717 59
Taiwan TAIEX 1.993 16 Bulgaria SOFIX 1.707 60
Netherland AEX 1.993 17 Iceland OCEXI 1.699 61
HK HSI 1.989 18 Ukraine PFTS 1.688 62
Luxemburg Luxx 1.988 19 Bermuda BSX 1.687 63
Canada SPTSX 1.987 20 Nigeria NGSEINDX 1.683 64
New Zealand NZX50 1.985 21 Romania BET 1.671 65
USA DJIA 1.984 22 Kuwait SECTMIND 1.668 66
Austria ATX 1.981 23 Lebanon BLOM 1.664 67
Malta MALTEX 1.978 24 Malaysia KLSE 1.646 68
Hungary BUX 1.968 25 Bangladesh CSE 1.633 69
Italy FTMIB 1.963 26 Cyprus CYSMMAPA 1.633 70
Lithuania VILSE 1.960 27 Mauritius SEMTRI 1.624 71
Singapore STI 1.958 28 China SSEC 1.621 72
Finland OMXH25 1.955 29 Kazakhstan KZKAK 1.584 73
CR PX 1.953 30 SA TASI 1.560 74
Belgium BFX 1.952 31 Qatar DSM 1.509 75
Israel TA35 1.950 32 Tanzania DARSDSEI 1.487 76
Estonia TALSE 1.948 33 Argentina MERV 1.482 77
Thailand SETI 1.947 34 Oman MSM30 1.469 78
Norway OSEBX 1.945 35 Jordan JOSIGW 1.230 79
Philippines PSI 1.942 36 Greece ASE 1.221 80
Ireland ISEQ20 1.937 37 Egypt EGX30 1.129 81
Morocco MOSEMD 1.932 38 Mongolia MSETOP 1.168 82
Turkey BIST 1.924 39 Venezuela IBVC 0.941 83
Mexico MEXBOL 1.914 40 Panama BVPS 0.591 84
Slovenia SBITOP 1.913 41 Palestine PASISI 0.387 85
Namibia NSEIL 1.906 42 Peru IGBVLVOL 0.160 86

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348 Journal of Quantitative Economics (2022) 20:337–377

Table 1  (continued)
Country Index APEn Ranking Country Index APEn Ranking

Latvia RIGSE 1.901 43 Costa Rica CRSMBCT 0.0002 87

Pakistan KSE 1.892 44

bang economic reforms in 1998, adoption of timely disclosure network and delivery
versus payments (DVP) system in 1999, depreciation of the yen during 2011–13,
and lower vulnerability to the external shocks made Japanese stock market as the
most efficient one. In the case of Switzerland, the implementation of the Financial
Market Supervision Act (FINMA) and the International Monetary Fund (IMF) grant
of CHF 400 billion for the development of financial markets improve the weak form
of efficiency. The sound macroeconomic and market fundamentals determine the
efficiency level in Australia. Our result supports Kristoufek and Vosvrda (2013),
who document Japan as the most efficient market between 2000 and2011.7 Nonethe-
less, Cajueiro and Tabak (2005) and Lim (2007) find the highest level of efficiency
in the US stock markets during 1991–2004 and 1992–2005, respectively. Mensi
(2012) finds Argentine as the most efficient stock market based on Shannon entropy
estimates. Our ranking differs from the previous research. We consider a relatively
long period and cover the important events. Our method is also robust to financial
instability and noise.
We follow the International Finance Corporation (IFC) method to classify the
markets as DMs and EMs.8 We show that DMs secure the topmost positions in the
efficiency ladder. The finding supports the view of Yang et al. (2019) with the analy-
sis of the pricing part of the stock market efficiency. The disaggregated analysis9 of
different market conditions implies the highest level of efficiency in Brazil, South
Africa, and India among EMs. A higher degree of informational efficiency of these
markets is associated with setting up the common currency reserve pool with the
minimum capital of $100 billion reserves after the global financial crisis (GFC).
This reserve plays a vital role in protecting these markets against further external
financial shocks and funding the local market infrastructures. Moreover, 71 percent
devaluation of the Brazilian real in 1999, the memorandum of the investment fund
protocol of $120 million between the US and South Africa in 1996, and increased
IPO activities in India during 2005 improved the efficiency of these markets.
A disaggregated analysis of geographical regions shows European stock markets
as highly efficient compared to the other regions (Table 1). The adoption of a single

7
Kristoufek and Vosvrda (2013) analyze the Japanese NIKKEI whereas we include Japanese Tokyo
stock exchange as our sample market for the analysis. In this aspect, we argue that Japanese stock market
remained the most efficient market over the years.
8
IFC, World Bank classifies the stock markets based on level of per capita gross national income
(PGNI). Accordingly, the stock markets of the upper middle-income, lower middle income, and the
lower-income economies having PGNI of below $12,235 are EMs whereas the stock markets of the
higher income countries having PGNI of above $12,235 are considered as the developed markets.
9
We report the list of disaggregated markets in Appendix A.2.3.

13
Journal of Quantitative Economics (2022) 20:337–377 349

Fig. 1  Cluster analysis for full-sample and sub-samples. Note: In Panel A, the markets with APEn values
greater ≥ 1.3 (black dots) are highly efficient, whereas ≤ 1.3 entropy values indicate a lower degree of
efficiency (the red dots). Panel B reports the cluster analysis of DMs, and EMs, including highly effi-
cient DMs (APEn ≥ 1.7; black dots), less efficient DMs (APEn ≤ 1.7 ≥ 1; red dots), highly efficient EMs
(APEn ≥ 1; green dots), and less efficient EMs (APEn ≤ 1 ≥ 0; blue dots). The dots in Panel A are crowd-
ing on each other as the values of APEn for the respective markets are notably not different. In Panel B,
the threshold of the higher degree of efficiency varies between DMs (i.e.1.7) and EMs (i.e.1) due to the
diversified market conditions

currency system (Euro) reduced the exchange rate risks within the region, which
made Europe a significant investment destination for international investors. The
EMs in Asia and North–South America are the least efficient. The geopolitical ten-
sions in these regions and the greater vulnerability of the markets to the regional cri-
sis explain the lower degree of information aggregation. Our results on the ranking
of regional stock market efficiency are in line with Kristoufek and Vosvrda (2013,
2014), who document the highest (lowest) efficient markets in Europe (Asia-Latin
America) during 2000–2011. Our finding on the highest efficiency in Europe also
supports the findings of Mensi (2012). These studies employ composite index and
Shanon entropy, respectively.
The extent of variation in APEn values from one market to another motivates us
to cluster the regional stock markets according to their level of efficiency (Eq. 8).
The cluster analysis presented in Fig. 1 indicates a higher level of efficiency in the

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350 Journal of Quantitative Economics (2022) 20:337–377

Jordan Israel HK Bahrein

Bangladesh
Thailand Japan

Sri Lanka Kuwait

Phillipnes Oman

Palestine Qatar

Pakistan SaudiArabia

Mongolia Singapore

Malaysia SK
Lebanon Taiwan
Khazkhstan UAE
India
Indonesia China
Asia

(Panel A1) (Panel A2)

Israel
UAE HongKong

Taiwan Bahrein

SK Japan

Singapore Kuwait

SaudiArabia Oman
Qatar Asian DMs

(Panel B1) (Panel B2)

India
Jordan China

Bangladesh Indonesia

Thailand Khazkhstan

Sri Lanka Lebanon

Phillipnes Malaysia

Palestine Mongolia
Pakistan
Asian EMs

(Panel C1) (Panel C2)

Fig. 2  Cluster analysis of the stock markets in Asia. Note: Figure shows the absolute deviation of the
stock markets in Asia from the level of predictability (Panel A1, B1, C1 for Asia, Asian DMs, and Asian
EMs, respectively), and their ranking and clustering (in Panel A2, B2, C2 for Asia, Asian DMs and EMs
respectively) based on the level of absolute efficiency. Panel A1 and A2 represent the ranking and cluster-
ing of the stock markets in Asia. Panel B1 and B2 shows the ranking and clustering within the sub-sample
of Asian DMs, whereas Panel C1, C2 report ranking and cluster analysis within the EMs. The centers of
the ranking plots (A1, B1, and C1) suggest the normal deterministic state. The higher deviation from the
center suggests the presence of a higher degree of complexities in the particular market and thus suggests
a higher level of informational efficiency, and vice versa. The cluster analysis (Panel A2, B2, C2) reports
the benchmark entropy estimates for the higher or lower degree of informational efficiency in Asia along
with in its disaggregated DMs and EMs. The threshold for the higher degree of efficiency in the aggre-
gated sample (i.e., 1.3, shown in Panel A2) and regional DMs (i.e., 1.7 in Panel B2) remain the same
as in the previous full-sample and full-DMs sub-sample analysis respectively (Fig. 1). Nevertheless, the
EMs in Asia, unlike the full-EMs sample (Fig. 1), are highly efficient due to their higher APEn values of
above 1.5

13
Journal of Quantitative Economics (2022) 20:337–377 351

sample stock markets except Greece, Jordan, Egypt, Mongolia, Venezuela, Panama,
Palestine, Peru, and Costa Rica (Panel A). The market returns in DMs and EMs
exhibit a higher degree of complexities (i.e., above 1.7 and 1 respectively) (Fig. 1,
Panel B) and thus are highly efficient. Nevertheless, the degree of efficiency is lower
in Slovakia, United Arab Emirates, Iceland, Bermuda, Kuwait, Cyprus, Saudi Ara-
bia, Qatar, Oman, and Greece among the DMs, and Venezuela, Panama, Palestine,
Peru, and Costa Rica among the EMs.
We further analyze the stock market efficiency based on geographical charac-
teristics to ensure the robustness of ranking and inferences. Japan is the most effi-
cient market in Asia, whereas Oman, Qatar, Saudi Arabia, Kuwait, and United Arab
Emirates are the least efficient in the region (Fig. 2, Panel 3­ B1 and ­3B2). The lack of
reforms, the weak primary market in the Sultanate with only one IPO during 2010,
and lower trading volume during 2015 explain the lower level of informational effi-
ciency of these markets. The Asian Gulf markets, although economically developed,
but these markets are not on par with free capital markets in the West. Among the
Asian EMs, India is the most efficient (Fig. 2, Panel ­C1) because of its sustained
economic reforms since 1991 and a tremendous investment in market infrastruc-
ture. Most of the stock returns in Asia hold a greater extent of complexities of above
1.5 except Jordan, Mongolia, and Palestine (Panel A ­ 2), indicating a random walk of
returns.
In Europe, Switzerland and Greece experience the highest and lowest degree of
efficiency, respectively. Our results support Baciu (2014), who ranked the European
stock markets based on long-range dependence, fractal dimensions, and efficiency
indices. The lowest deviated pattern from the central predictability point in Greece is
associated with the internal sovereign debt crisis in 2011 and the twin deficit during
2015 (Fig. 3, Panel A­ 1). Among EMs, Serbia is relatively efficient due to its upgraded
credit ratings from B ­ B− to B­ B+ and the sound macroeconomic fundamentals that
attract major institutional investors. In contrast, the lack of financial market reforms
and political instability reduces the level of efficiency of the Romanian stock market
(Fig. 3, Panel ­C1). We find a higher degree of complexities in most of the European
stock markets (Panel A ­ 2) except Slovakia, Ireland, Cyprus, and Greece among the
DMs group (­ B2); and Bulgaria, Ukraine, and Romania among the EMs peers (­ C2).
Canada and Chile are the most efficient markets (Fig. 4 Panel ­A1). Such a high-
est level of efficiency is associated with increased international competitiveness dur-
ing the free trade reforms. Further, the sound macroeconomic fundamentals insulated
the economies from external shocks. The disaggregated analysis reveals Bermuda’s
bottom-most position among the DMs due to its relatively more significant expo-
sure to external shocks. In EMs, Brazil holds the highest level of efficiency, whereas
North-American Costa Rica remains inefficient as the market is still in its infant stage
(Panel ­C1). All the stock markets of the region exhibit random-walk characteristics
(i.e., entropy value ≥ 1.5), barring Venezuela, Panama, and Costa Rica (­ A2 and ­C2).
In the African and Pacific Ocean regions (Fig. 5), Australia and South Africa
exhibit the highest degree of complexities among DMs and EMs,10 whereas Peru

10
We arrange the stock markets from Africa, and Pacific Ocean in one sample due to insufficient num-
ber of markets for a meaningful cluster analysis.

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352 Journal of Quantitative Economics (2022) 20:337–377

Fig. 3  Cluster analysis of the stock markets in Europe. Note: Figure shows the absolute deviation of the ▸
stock markets in Europe from the level of predictability (Panel A1, B1, C1 for Europe, European DMs,
and European EMs, respectively), and their ranking and clustering (Panel A2, B2, C2) based on their level
of absolute efficiency. In other words, panel ­A1 and ­A2 represent the ranking and clustering of the stock
markets in entire Europe. Panel B1 and B2 shows the ranking and clustering within the sub-sample of
European DMs, whereas Panel C1 and C2 report ranking and cluster analysis within the European EMs.
The centers of all the ranking plots (Panel A1, B1, and C1) represent the deterministic points, and the
greater deviation from such points indicate the presence of specific unpredictable patterns in the stock
return series, which explains a higher level of informational efficiency, and vice versa. The cluster analy-
sis indicating the market efficiency characteristics of the region and the regional sub-groups—DMs and
EMs are presented in A2, B2, and C2, respectively, which reports the benchmark entropy estimates for the
higher or lower degree of informational efficiency in the particular sample. The threshold for a higher
degree of informational efficiency in the aggregated European sample (Panel A2) and regional EMs
(Panel C2) remained the same as 1.7, which is higher than the previous full-sample and full-EMs sample
(Fig. 1). Similarly, the DMs in Europe, unlike the full-DMs sample (Fig. 1), are highly efficient due to
their greater APEn values of above 1.8

exhibits predictable patterns. We refute the previous findings of Mensi (2012) that
suggested the lowest degree of efficiency in South Africa during 1997–2007. These
markets have introduced several reforms in recent years, which positively impact the
stock market efficiency. Further, the approximate entropy has the advantage over
other methods in capturing the complexities. The previous research predominantly
termed the developing markets inefficient and thus failed to capture the impact of
liberalization. Our present findings show that the rejection was due to complexities
which the previous methods applied were not appropriate to capture.
The degree of informational efficiency and its characteristics varies from region
to region and from one type of market to the other. We show that the geopoliti-
cal, geo-economic, and development stages of the economy & the market describe
the variation in the degree of efficiency. Hence, investigation of the evolution of
these markets is indispensable for a comprehensive understanding of the level of
efficiency.

Rolling Window Analysis

We employ the rolling window approach to measure the degree of time-varying effi-
ciency. This approach overcomes the problem of an arbitrary division of the full
sample into various subsamples, which are often biased (Campbell et al. 1997). The
pre and post-analysis or a structural break approach do not capture the impact of
any event, policy, or regulatory change over the period. Static analysis cannot cap-
ture such continuous changes. The event study analysis is often biased because of
their sensitiveness to the event date and other biases in financial market research
(Campbell et al. 1997). Therefore, the rolling window framework is appropriate for
investigating the time-varying efficiency and identifying the events associated with
such time variation. In the rolling window analysis, the selection of the length of
the window size remained controversial (Zhou and Lee, 2013; Charles et al. 2012).
Hiremath and Narayan (2016) suggest that the length of the window size should
have enough observations to capture the size and power properties of the time
series methods. Therefore, we choose an optimal window length of 500 time-series

13
Journal of Quantitative Economics (2022) 20:337–377 353

CR
Italy Roma Den
Esto
Ukai Finl
B&H Fran
Ser Ger
Mace Aust
Croat Gree
Bulga Hung
Cyp Irel
Icel Latv
UK Lithua
Switz
Luxem
Swe
Malta
Spa Nether
Slove Norw
Slovak Portu Belg
Pola Europe

(Panel A1) (Panel A2)

Cyprus CR
Denmark
Iceland
Estonia
UK Finland
Switzerland France
Sweden Germany
Austria
Spain
Greece
Slovenia
Hungary
Slovakia
Portugal Ireland
Poland Latvia
Belgium Lithuania
Norway
Malta Luxemborg
Netherland
European DMs

(Panel B2)
(Panel B1)

Bulgaria

Romania Croatia

Italy Macedonia

Ukairaine Serbia

B&H
European EMs

(Panel C1) (Panel C2)

observations following the approach of Inoue and Rossi (2017). This method mini-
mizes the quadratic loss function and performs excellently under structural changes.
Besides, the method is asymptotically valid. Our sample is rolled one point forward
by eliminating the first observation and including the next one to estimate the next
entropy value.
The descriptive statistics in Table 3 show that the average degree of entropy ≥ 1
for all stock markets (except Palestine, Panama, and Peru). The estimate suggests
the randomness of returns and therefore exhibits a higher level of informational
efficiency. The positive skewness of the entropy series for most DMs suggests a

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354 Journal of Quantitative Economics (2022) 20:337–377

Fig. 4  Cluster analysis of stock markets in North–South America. Note: Figure reports the absolute devi- ▸
ation of the stock markets in North–South America from the level of predictability (Panel A1, B1, C1 for
the entire region, regional DMs and EMs, respectively), and their ranking and clustering (in Panel A2,
B2, C2 for North–South American markets, regional DMs and EMs respectively) based on their level of
absolute efficiency. In particular, panel A1 and A2 represent the ranking and clustering of the stock mar-
kets in North–South America. Panel B1 and B2 shows the ranking and clustering within the sub-sample
of regional DMs, whereas Panel C ­ 1 and C2 report ranking and cluster analysis within the regional EMs.
The centers of all the ranking plots (Panel ­A1, B1, and C1) represent the deterministic points. The higher
deviation from such points suggests the presence of greater irregularities in the stock return series and
a higher level of market efficiency and vice versa. The cluster analysis (Panel A2, B2, C2) reports the
benchmark entropy estimates for the higher or lower degree of informational efficiency in the region and
the regional subgroups of DMs and EMs. The threshold for the higher degree of informational efficiency
in the aggregated region (Panel A2) and the regional EMs (Panel C2) remained the same as 1.5, whereas,
for the regional DMs, it is nearly 2, which are higher than that of the previous full-sample analysis
(shown in Fig. 1)

greater magnitude of unpredictability and, thus, a higher degree of efficiency. In

EMs, negative skewness of the entropy values suggests that most of these markets
are characterized by a lower degree of efficiency due to their peculiar characteristics.
Nevertheless, the returns pattern of the EMs such as India, Philippines, Sri-Lanka,
Thailand, Croatia, Serbia, Ukraine, Italy, Kenya, South Africa, Tanzania, Tunisia,
Mexico, Brazil, Russia, and Turkey display remarkable improvement in the degree
of informational efficiency but not identical to the DMs. The kurtosis of the entropy
values with a few exceptions suggests the platykurtic statistical distribution and,
therefore, distraction is flat, and the tail is thick. Jarque–Bera statistics also reject
normal distribution (Table 3).
We present the rolling entropy estimates across the regions in Figs. 6, 7, 8, 9.
We observe the evolution of the level of informational efficiency over the period,
and markets switch between efficiency and predictability. This transition from
episodes of efficiency-predictability is neither smooth nor fixed. It shows that the
market continuously changes, and thus challenging for an investor to earn excess
returns despite potential opportunities. We inquire into the economic and non-eco-
nomic events attributed to episodic stock market efficiency. Therefore, we broadly
survey the annual reports of the respective country’s monetary authority, news-
papers, economic and financial surveys of the IMF and the credit rating agencies.
Besides, we identify certain region-specific events associated with the time varia-
tion in each region.
We find three common periods 1995–96, 1999, and 2014 during which informa-
tional efficiency across the markets increased, indicating the influence of universal
and global events on efficiency. The economic reforms and consequent sound macro-
economic fundamentals are associated with these peaks. We find that the changes in
microstructure and improvement in trading infrastructure boosted the efficient func-
tioning of the stock markets. In particular, the electronic trading platform enables
the investors to update with the new information, and their trading quickly incor-
porates the information into the security prices. Besides, the sound macroeconomic
fundamentals attracted major institutional investors, which enriched the domestic
stock markets with global information (Bae et al. 2012). Nevertheless, Israel, Oman,
South Korea, Chile, and Jamaica could not benefit from global influence because

13
Journal of Quantitative Economics (2022) 20:337–377 355

Canada
CostaRica Bermuda

Venezuela USA

Colombia Chile

Brazil Jamaica

Argentina Mexico
Panama North-South America

(Panel A1) (Panel A2)

Canada

Chile Bermuda

USA North-South American DMs

(Panel B2)
(Panel B1)

Jamaica

CostaRica Mexico

Venez Panama

Colombia Argentina

Brazil
North-South American EMs

(Panel C2)
(Panel C1)

of their domestic political instability and deterioration in macroeconomic situations.

Further, the local financial crashes restrained Taiwan, Sri Lanka, Mexico, Argen-
tina, the US, Peru, Jordan, Kuwait, Philippines, Lebanon, and Portugal from taking
advantage of the conducive global environment.
The stock market efficiency faced the trough periods in 1997–98, 2000–01,
2004–05, 2007–08, 2010–12, and 2015–16. Several financial shocks such as the
East-Asian currency crisis, the US dot-com bubble burst, and a terrorist attack on

13
356 Journal of Quantitative Economics (2022) 20:337–377

Kenya
NewZealand Mauritius

Australia Morocco

Turkey Namibia

Russia Nigeria

Egypt SouthAfrica

Tanzania
Peru
Tunisia African and Joint regions EMs
Ocean-Pacific DMs

(Panel A )
(Panel B )

Fig. 5  Cluster analysis of stock markets in Africa, and the Pacific Ocean. Note: Figure shows the abso-
lute deviation of the stock markets in Africa and the Pacific Ocean from the level of predictability (Panel
A) and their ranking and clustering (Panel B) based on the level of absolute efficiency. The centers of
the ranking plot (Panel A) represent the normal deterministic point. The higher deviation from such
point implies the presence of a greater extent of complexities in the particular market and thus suggests
a higher degree of informational efficiency over the period. The cluster analysis (Panel B) reports the
benchmark entropy estimates for the higher or lower degree of informational efficiency in Africa and
Pacific regions. The threshold for a higher degree of informational efficiency in this sample is ≥ 1 that
remained the same as in the previous full-EMs analysis (Fig. 1)

World Trade Center, the US-Iraq war, dollar crisis, global financial crisis (GFC),
Eurozone sovereign debt crisis, and fluctuation of international oil prices are associ-
ated with the respective international troughs. Nonetheless, some markets with bet-
ter market characteristics, advanced trading infrastructure, and an improved macro-
economic environment defy such global downtrends and hold better diversification
opportunities for international investors. For instance, Japan was immune to the
major downturns in the global markets thanks to its unique big-bang reforms. The
creation of Euronext11 positively influenced the informational efficiency of France
and the Netherland between 1997 and 2005 and therefore held better returns for
both the US and Asian investors.12 With their limited degree of financial openness,
Kenya, Lithuania, and Sri Lanka remain immune to the significant troughs. These
economies can be benefitted from liberalization, and global investors need to explore
them for better investment and diversification opportunities. Philippines, Kazakh-
stan, Mongolia, Austria, Slovakia, Latvia, Poland, Ukraine, Jamaica, Colombo,
Tunisia, Egypt, Lebanon withstood the dot-com bubble burst, and Palestine, Bangla-
desh, and Morocco remained unaffected by the GFC. These countries still maintain
extensive capital controls.

11
Euronext is a group of financial markets from France, Belgium, and the Netherland. The cooperation
mechanism of Euronext monitors and supports the integration of operational systems for trading, clear-
ing, and settlement-delivery and strives for harmonization and the unification of the market rules.
12
We argue that the lack of integration of the Euronext with the US and Asia makes the former region
immune to the particular shocks and therefore indicate the better diversification opportunities for inves-
tors from the latter regions.

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Journal of Quantitative Economics (2022) 20:337–377 357

Fig. 6  Evolution of stock market efficiency in Asia. Note: We calculate the degree of time-variation in
the efficient functioning of the individual stock markets in Asia. The red and blue lines display trends in
the entropy estimates in the Asian DMs and EMs, respectively. The Asian sample consists of 12 DMs
and 12 EMs

Region‑Specific Events

We estimate time-varying efficiency across the regions and identify the periods
during which each region exhibits a unique pattern in the degree of stock mar-
ket efficiency. We decipher the region-specific economic and non-economic
events explaining the ups and downs of the stock market efficiency in the region.
Such events ostensibly vary from one region to another. We measure the extent

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358 Journal of Quantitative Economics (2022) 20:337–377

Fig. 7  Evolution of stock market efficiency in Europe. Note: The sample for the European region consists
of 27 DMs and 8 EMs. The red line displays trends in the entropy values of European DMs, and the blue
line reports that of the EMs

of time-varying efficiency in Asia (Fig. 6). We do not find common peaks and
troughs in the stock markets of Asia. The evidence suggests the absence of market
convergence, and thus functioning of each market depends on its unique character-
istics in Asia. Such a feature implies the possibility of diversification opportunities

13
Journal of Quantitative Economics (2022) 20:337–377 359

Fig. 8  Evolution of stock market efficiency in North–South America. Note: The sample of North–South
America consists of 4 DMs and 8 EMs. The red and blue lines display trends in the entropy estimates in
the North–South American DMs and EMs, respectively

within the region. Simultaneously, the more significant capital inflows from the
global market boosted the trading & market turnover and increased the informa-
tional efficiency in Hong Kong, United Arab Emirates, Indonesia, India, Philip-
pines, Pakistan, Malaysia, Palestine, Lebanon, and Bangladesh (see, Hiremath and
Kattuman 2017). The peaks in South Korea and Thailand (1998), Pakistan (2016);

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360 Journal of Quantitative Economics (2022) 20:337–377

Fig. 9  Evolution of stock market efficiency in Africa, and the Pacific Ocean. Note: The sample consists
of 2 DMs and 9 EMs. The red lines explain the trends in the entropy estimates for the DMs of the Pacific
Ocean, and blue lines display that of the African EMs over the period

Jordan (2002–04); and Mongolia (2017) are associated with the IMF grants for
domestic financial stability. The increased degree of efficiency in Taiwan and the
Philippines (2014); Singapore, Saudi Arabia, and Pakistan (2003–04); Malay-
sia (2006); and Japan (2017) are attributed to the heightened corporate earnings.

13
Journal of Quantitative Economics (2022) 20:337–377 361

However, due to economic instability, Mongolia, the Philippines, Sri-Lanka, Thai-

land, and Jordan do not follow such a common uptrend.
We find the local geopolitical tensions as a common factor associated with the
downturns in Israel, South Korea, Taiwan, and Jordan (2002); Kuwait, and Singapore
(2016); Philippines and Malaysia (2010); Lebanon and Thailand (2014); Kazakhstan
and Bangladesh (2015); Sri Lanka (1994); and Mongolia (2005). In 2015, the troughs
in the degree of efficiency in Hong Kong, Taiwan, Qatar, and Malaysia were associ-
ated with the significant sell-offs by institutional investors. A similar plunge in Japan,
Taiwan, the Philippines, and Thailand was related to the spillover effect of China’s
financial turbulence. The Syrian conflicts in the Middle East are another region-spe-
cific factor associated with the deterioration of informational efficiency in a few mar-
kets such as Jordan, the Philippines, Kuwait, and Lebanon.
Additionally, the higher interest rate environment indicates the increase in macro
stress that adversely affected the level of informational efficiency in Malaysia and
the Philippines (2006), Israel and Hong Kong (1999), Qatar (2000), and Japan
(2013). Overall, most of the stock markets in Asia parade the bearish market senti-
ments due to the Asian currency crisis and the consequent contagion effects across
the regions, which ruffle domestic investors’ confidence, thus reducing the informa-
tional efficiency in the region. Nevertheless, Oman, Japan, South Korea, and China
resisted this downtrend thanks to their structural reforms.
In Fig. 7, we present the degree of time-variation in the stock market efficiency
in the European continent. We find 2002–04, 2004–05, 2005–06, and 2014–15 as
the episodes of the higher level of efficiency in Europe. The adoption of the single
currency system led to the unification of the regional financial markets and therefore
removed the exchange rate risk within the region. In addition, the successful launching
of SETS™ and landmark™ in the UK, new amendment for the listing of securities in
France, and implementation of the Single Match System by Swift Net in Spain on the
eve of the common currency platform efficiently increased the speed of information
dissemination into the security prices. However, Cyprus, Slovakia, Slovenia, Croatia,
and Malta lag behind due to their delay in joining the Euro system. The efficiency of
European stock markets is also associated with the local corporate reforms, such as the
increase in mergers and take-over bids in the major European stock markets.
The degree of stock market efficiency in Europe hit a record low during 2012–13
and 2015–16. The double-dip recession due to the Eurozone sovereign debt cri-
sis and the vulnerability of the regional markets to the Brexit negotiation can be
attributed to such informational inefficiency. Nevertheless, the policy measures in
France, Denmark, Iceland, Norway, Belgium, Czech Republic, Hungary, Slovenia,
and Bosnia & Herzegovina insulated the efficiency of these markets from the crisis.
Similarly, Switzerland, Netherland, Ireland, Ukraine, Serbia, and Romania were not
affected by the news around Brexit and thus provided stability to the markets.
We document a higher degree of efficiency in North–South America in 2003–04,
which was better than many other regions (Fig. 8). The stock markets of the North-Amer-
ican region predominantly imitate the US market. Nonetheless, episodes of inefficiency
during 1994–95 and 1998–2002 were due to Mexico’s peso crisis and the great depres-
sion in Argentina. Besides, the Petroleum crisis in Brazil and domestic political instability
in Canada adversely affected the level of informational efficiency of these markets.

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362 Journal of Quantitative Economics (2022) 20:337–377

We find no significant common episodes of varying efficiency in Africa and the

Pacific Ocean region (Fig. 9). However, we find the sizeable foreign institutional
investors as the primary factor associated with a higher level of efficiency in South
Africa, Peru, Nigeria, Mauritius, Tanzania, and Morocco. The global investors incor-
porate global information into the domestic stock markets, internationalize the local
companies, and thereby increase the level of informational efficiency in the region.
Nevertheless, a few markets such as Kenya, Namibia, and Tunisia failed to benefit
from such investment due to their below-average market infrastructure and weak eco-
nomic growth. In contrast, domestic financial instability and lower economic growth
are the common factors related to the periods of inefficiency in Africa. The markets
in the Pacific Ocean follow the global trends alone and exhibit no unique episodes.
We further compute the rolling entropy estimates for the cross-regional stock mar-
kets in 100, 150, 300 random sequences (11–16) to ensure robustness to our infer-
ences. We compute Kruskal–Wallis statistics to compare the extent of time-variation
in the degree of informational efficiency of DMs and EMs.13 The Kruskal–Wallis
non-parametric statistics show the significance of differences in the entropy esti-
mates in different window periods. The rejection of null indicates that the values of
the entropy estimates differ from one window to another. In other words, the result
implies a time-dependent pattern in the degree of complexities of the return series.
We show that economic reforms, capital market liberalization combined with micro-
structure changes significantly boosted the level of efficiency in EMs. Nonetheless,
financial liberalization also exposed these economies to external shocks. The EMs that
pursued constant and gradual structural reforms, along with prudential norms such as
stringent disclosure norms, higher corporate governance, effective regulation in place,
have benefitted mainly from global finance without its ill-effects to a greater extent.
The findings suggest that EMs such as Africa were rarely affected by external fac-
tors because of a lack of economic liberalization and exposure to the global markets.
However, these markets lost the benefits of liberalization in terms of vibrancy and infor-
mational efficiency, as the evidence suggests the lowest degree of efficiency. The Asian
markets not only defy the global trends often but rarely move in tandem with each
other, especially after 1997. The evidence suggests that these markets possibly offer
diversification opportunities. The result suggests that investors adapt to the changing
market environment, which results from various factors. As investors learn and adapt to
the market ecology, the market moves towards efficiency. However, investors take time
to respond to changes in regulations, external or internal shocks, trading mechanisms,
among others. Due to such delay, returns do not adjust instantaneously to the new infor-
mation and allow smart traders to find potential excess returns as they quickly adapt
to changing market ecology. The previous literature termed developing and emerging
markets inefficient due to the presence of predictability.
Nevertheless, the complexity of the return behavior, as evident from the entropy
estimates in the present study, suggests that the excess returns, although present, are
not easily exploited by smart and rational traders. Hence, the developing and emerg-
ing markets have improved the degree of efficiency by introducing reforms. The
returns behavior in these markets is complex. Our results thus do not rule out the

13
We have not reported these test statistics to save the space.

13
Journal of Quantitative Economics (2022) 20:337–377 363

technical analysis. The technical analysts need to identify these cycles of efficiency
and inefficiency and quickly adapt to outsmart the market. The finding of the evolu-
tionary nature of market efficiency and the influence of varied factors and events for
such evolution validate the AMH framework reconciling the EMH and its anoma-
lies. The entropy method applied in this study is proved to be appropriate to capture
such complexities and evolving market ecology.

Conclusion

The present study measures the absolute and evolving efficiency of the stock markets
across Asia, Europe, North–South America, Africa, Pacific Ocean regions. We rank
the stock markets based on their level of informational efficiency using the entropy
method and find Japan, Switzerland, and Australia as the most efficient markets. The
analysis shows that European markets are the most efficient markets. The degree of
efficiency of the developed stock markets is higher irrespective of geographical loca-
tion. The emerging stock markets have significantly improved their level of efficiency
by introducing economic reforms and market microstructure changes. However, the
evidence shows that growing globalization exposed them to global shocks, and the
stock market efficiency hit a low at times due to external shocks. The findings of
the study suggest that stock market efficiency evolves over the period. The global,
regional, and local economic and non-economic events influence such evolution. The
AMH framework better describes such evolution and factors.
We show that abnormal returns often exist in the markets, but such opportunities are
time-varying and complex. The finding suggests that traders need to quickly adapt and
innovate in order to earn excess returns. The traders require to identify the episodes of
predictability and follow a smart investment strategy since such opportunities stay for
long. In such a case, active portfolio management assumes further significance. Our
evidence does not rule out the importance of technical trading as episodes of predict-
ability arise in the market from time to time. However, technical analysts need to adapt
quickly in a competitive market and under complex returns to make abnormal profits.
The findings of the present study suggest that global investors should avoid homogene-
ity bias about a geographical region or type of market as abnormal returns are present
within each region at different times and across markets within the region. Diversifica-
tion and higher return opportunities exist within the region as well as the same type
of markets. Africa can take clues from the policy experience of the markets in Asia to
make better use of liberalization. Our inference is limited to the chosen statistical mod-
els. The further verification of portfolios can be exciting but beyond the scope of the
present work. The present research needs to be extended into a technical trading frame-
work to verify profitability. Also, testing portfolio opportunities based on the present
evidence can be part of future research.

Appendix A

See Tables 2, 3 and Figs. 10, 11, 12, 13, 14, 15, 16.

13
 Table 2  Descriptive statistics of stock market returns
364

Country Mean S.D Skew Kurto JB Test Obs ADF Test Country Mean S.D Skew Kurto JB Test Obs ADF Test

13
Panel A: Developed markets (DMs) Panel B: Emerging markets (EMs)
Israel 0.01 1.67 − 0.68 10.85 16,290*** 6154 -17.53** India 0.03 1.75 − 0.18 10.19 13,323*** 6154 − 17.27*
HK 0.03 1.74 0.43 16.06 43,956*** 6154 − 17.22** China 0.24 3.39 5.33 66.96 107,820*** 6154 − 16.00**
Bahrain 0.02 0.69 − 0.06 8.92 11,342*** 3413 − 13.73** Indonesia − 0.04 2.69 − 1.65 54.70 688,260*** 6154 − 15.27**
Japan 0.03 1.51 0.12 7.05 4233*** 6154 − 17.36** Khazkhstan 0.04 2.86 0.76 51.12 485,610*** 4451 − 15.02**
Kuwait − 0.01 1.15 − 0.61 8.94 9600.1*** 2819 − 11.59** Lebanon 0.02 1.29 3.79 65.48 101,810*** 5618 − 16.59**
Oman 0.09 1.45 5.75 113.2 314,870*** 6154 − 17.25** Malaysia 0.04 2.12 12.09 351.6 313,180*** 6154 − 17.81**
Qatar 0.07 1.88 − 0.76 21.18 93,186*** 4953 − 16.45** Mongolia 0.34 7.16 8.34 145.7 417,380*** 4848 − 15.68**
SaudiArabia 0.12 1.87 − 0.91 24.30 151,950*** 6134 − 16.91** Pakistan 0.03 1.70 − 0.43 10.71 15,464*** 6154 − 15.96**
Singapore 0.02 1.28 − 0.19 4.74 4423.1*** 4677 − 15.55** Palestine − 1.51 13.58 − 10.15 113.1 287,870*** 5227 − 10.78**
SouthKorea 0.04 2.38 − 0.02 25.55 130,420*** 6154 − 17.07** Phillipnes 0.04 1.83 1.85 37.18 303,350*** 6154 − 16.95**
Taiwan 0.02 1.66 − 0.05 7.40 4972.6*** 6154 − 16.43** Sri-Lanka 0.02 1.24 0.04 27.90 159,030*** 6154 − 16.03**
UAE 0.07 1.24 0.31 8.42 12,312*** 4134 − 13.91** Thailand 0.01 1.85 0.04 11.29 17,628*** 6154 − 15.37**
CR 0.05 1.80 0.71 12.14 37,961*** 6086 − 16.78** Jordan 0.06 3.28 − 0.69 58.89 801,660*** 6154 − 22.43**
Denmark 0.05 1.42 − 0.26 9.33 10,351*** 6154 − 17.10** Bulgaria 0.13 2.27 6.05 112.6 234,350*** 4377 − 13.79**
Estonia 0.07 1.32 0.35 10.32 10,947*** 4848 − 14.66** Croatia 0.02 1.49 0.23 12.66 26,478*** 4377 − 13.08**
Finland 0.04 1.71 − 0.07 7.21 3595.6*** 4848 − 15.72** Macedonia 0.02 1.54 − 0.62 10.86 16,401*** 3283 − 11.36**
France 0.03 1.54 0.03 8.78 8580.9*** 6154 − 17.84** Serbia − 0.01 1.35 0.07 14.65 30,001*** 3349 − 12.51**
Germany 0.05 1.59 − 0.08 7.43 5059.3*** 6154 − 18.14** B&H − 0.03 1.43 0.05 5.35 3585.6*** 2998 − 12.28**
Austria 0.03 1.59 − 0.20 9.83 12,012*** 6154 − 16.55** Ukairaine − 0.03 2.85 0.32 29.48 185,110*** 5103 − 14.96**
Greece − 0.33 6.85 − 16.44 312.4 248,310*** 6154 − 13.05** Italy 0.09 1.72 − 0.19 8.58 6327.7*** 4848 − 15.05**
Hungary 0.02 2.20 − 1.59 30.43 195,630*** 6154 − 16.33** Kenya − 0.01 1.47 1.56 93.44 210,020*** 6154 − 17.41**
Ireland 0.02 1.57 − 0.52 10.99 13,142** 4848 − 16.22** Mauritius 0.04 1.04 − 0.21 8.29 10,208** 3543 − 12.66**
Latvia 0.06 1.61 − 0.26 11.32 24,602** 4588 − 15.59** Morocco 0.03 1.01 − 0.01 4.22 3024.5*** 4066 − 15.18**
Lithuania 0.05 1.27 − 0.65 11.47 25,497** 4587 − 12.77** Namibia 0.03 2.19 − 0.22 4.31 2778.9*** 3529 − 14.73**
Journal of Quantitative Economics (2022) 20:337–377

Luxemborg 0.01 1.54 − 0.23 9.13 7643.2*** 4848 − 14.78** Nigeria 0.02 1.91 − 1.29 28.72 135,080*** 4848 − 16.61**
 Table 2  (continued)
Country Mean S.D Skew Kurto JB Test Obs ADF Test Country Mean S.D Skew Kurto JB Test Obs ADF Test

Malta 0.03 1.10 − 0.43 23.60 85,893*** 4848 − 16.71** Romania 0.07 3.07 0.61 35.87 278,560*** 5183 − 14.65**
Netherland 0.02 1.49 − 0.13 9.79 11,869*** 6154 − 17.59** South-Africa 0.03 1.82 − 0.39 5.76 8152.2*** 5764 − 17.81**
Norway 0.06 1.84 − 0.28 7.20 12,254*** 5632 − 16.71** Tanzania 0.06 1.34 1.96 39.80 186,070*** 2787 − 15.48**
Belgium 0.01 1.42 − 0.12 8.17 5423.7*** 4848 − 16.26** Tunisia 0.04 1.09 1.16 25.35 129,170*** 4777 − 14.76**
Poland 0.02 2.15 − 0.11 4.02 4052.1*** 6043 − 17.37** Peru 0.24 27.42 2.50 583.9 865,420*** 6154 − 18.52**
Portugal 0.01 1.37 − 0.18 8.85 8837.3*** 6154 − 16.64** Jamaica 0.04 1.37 0.78 13.10 26,804*** 6154 − 16.96**
Slovakia 0.12 2.30 4.12 53.72 596,710*** 4844 − 15.15** Mexico − 0.05 2.28 − 2.03 23.87 150,240*** 6141 − 14.09**
Slovenia 0.01 1.33 − 0.82 11.81 22,230*** 3742 − 12.59** Panama 0.24 3.06 0.68 34.78 151,950** 6134 − 16.91**
Spain 0.04 1.62 − 0.09 9.15 9728.6*** 6154 − 17.07** Argentina − 0.15 5.59 − 21.7 612.2 956,660*** 6154 − 16.15**
Sweden 0.03 1.77 − 0.02 8.35 7340.3*** 6154 − 18.05** Brazil 0.04 2.72 − 0.09 8.57 7988.3 *** 6154 − 17.11**
Switzerland 0.03 1.24 − 0.01 7.21 4549.1*** 6154 − 18.62** Colombia 0.05 1.75 − 0.17 8.47 12,608*** 4197 -14.28**
Journal of Quantitative Economics (2022) 20:337–377

UK 0.01 1.32 -0.09 11.48 18,538*** 6148 − 18.75** Venezuela − 0.15 7.41 − 14.4 287.3 2,094,400** 6154 − 17.07**
Canada 0.03 1.35 0.02 20.18 75,722*** 6154 − 18.06** Egypt − 0.47 6.63 − 10.93 136.0 404,520*** 5109 − 12.48**
Bermuda 0.03 1.39 − 1.07 41.81 441,170*** 6035 − 14.61** Russia 0.06 3.22 0.26 13.83 41,404*** 5183 − 16.31**
USA 0.02 1.15 − 0.51 13.99 31,245*** 6154 − 18.44** Turkey − 0.06 3.45 − 1.37 17.70 57,342*** 6154 − 17.03**
Chile 0.02 1.37 − 0.35 11.18 17,330*** 6154 − 16.59** Bangladesh 0.16 1.87 1.32 24.01 79,976*** 3284 − 13.93**
Australia 0.03 1.37 − 0.67 11.88 20,718*** 6154 − 17.84** CostaRica − 0.005 0.07 − 0.01 0.03 340,950*** 6127 0.68*
NewZea 0.06 1.23 − 0.59 10.55 20,361*** 4326 − 14.95**
Iceland 0.02 2.06 − 32.31 18.09 837,930*** 6154 − 15.24**
Cyprus 0.08 2.82 1.46 15.51 35,043** 3369 − 13.59**

Note: Panel A reports the descriptive statistics of the stock returns from the DMs, whereas Panel B presents the descriptive statistics of the EM returns. We follow IFC
to classify the sample markets into DMs and EMs based on the level of per capita gross national income (PGNI). SD denotes the standard deviation, and JB indicates the
Jarque–Bera normality test. Skew and Kurto are skewness and kurtosis, respectively. Augmented Dickey-Fuller (ADF0 test the null of unit root and rejection indicate sta-
tionarity of the market returns. *** and ** denote significance at 1% and 5% level, respectively.
365

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 Table 3  Descriptive statistics of the entropy values
366

Country Mean S.D Skew Kurto JB Test Obs Country Mean S.D Skew Kurto JB Test Obs

13
Panel A: Developed markets (DMs) Panel B: Emerging markets (EMs)
Israel 1.18 0.04 0.02 − 0.78 145.8*** 5655 India 1.17 0.04 0.25 − 0.51 123.08** 5655
HK 1.18 0.05 0.70 0.26 489.9*** 5655 China 1.20 0.08 − 0.22 − 0.06 50.66*** 5655
Bahrain 1.17 0.02 0.56 0.07 155.5*** 2914 Indonesia 1.17 0.08 − 2.60 8.90 25,059** 5655
Japan 1.18 0.03 0.44 − 0.20 195.8*** 5655 Khazkhstan 1.10 0.17 − 1.42 0.85 1460.1** 3952
Kuwait 1.20 0.04 − 0.55 − 0.84 187.56** 2320 Lebanon 1.16 0.07 − 0.55 − 0.50 317.05** 5119
Oman 1.12 0.07 − 0.74 0.66 627.9*** 5655 Malaysia 1.17 0.06 − 2.55 12.41 42,506** 5655
Qatar 1.11 0.14 − 1.81 3.01 4134.4** 4454 Mongolia 1.10 0.18 − 1.83 2.25 3371.9** 4349
SaudiArabia 1.18 0.06 − 0.59 − 0.16 340.28** 5635 Pakistan 1.16 0.03 − 0.04 − 0.04 12.49*** 5655
Singapore 1.15 0.02 0.03 − 0.02 5.81* 4178 Palestine 0.98 0.31 − 1.74 1.66 2948.5** 4728
SouthKorea 1.18 0.05 0.73 0.09 511.1*** 5655 Phillipnes 1.20 0.07 0.36 − 0.91 318.1*** 5655
Taiwan 1.17 0.04 1.32 2.33 2939.8** 5655 Sri− Lanka 1.19 0.03 0.64 0.04 387.48** 5655
UAE 1.17 0.04 − 0.35 0.05 79.02*** 3635 Thailand 1.18 0.04 0.40 − 0.17 164.19** 5655
Czech− Rep 1.16 0.04 0.92 1.21 1147.7** 5587 Jordan 1.02 0.20 − 0.71 − 0.85 653.46** 5655
Denmark 1.16 0.04 0.03 − 0.81 157.1*** 5655 Bulgaria 1.18 0.02 − 0.26 − 0.01 45.59*** 3878
Estonia 1.18 0.03 0.64 − 0.32 322.2*** 4349 Croatia 1.18 0.04 1.35 1.13 1234.7** 3450
Finland 1.14 0.04 0.22 − 0.57 96.49*** 4349 Macedonia 1.18 0.02 − 0.05 − 0.50 31.17*** 2785
France 1.15 0.03 0.67 0.42 472.0*** 5655 Serbia 1.20 0.07 0.44 0.37 107.2*** 2850
Germany 1.14 0.03 0.23 − 0.49 107.2*** 5655 B&H 1.15 0.02 − 0.17 0.04 13.03*** 2499
Austria 1.15 0.03 0.51 0.29 268.6*** 5655 Ukairaine 1.17 0.05 0.38 − 0.25 124.75** 4604
Greece 1.10 0.22 − 2.82 6.36 170.6*** 5655 Italy 1.16 0.03 0.12 − 0.59 75.84*** 4349
Hungary 1.18 0.03 0.12 0.10 17.35*** 5652 Kenya 1.21 0.06 0.12 − 0.23 26.29*** 5655
Ireland 1.15 0.04 0.27 − 0.55 109.5*** 4349 Mauritius 1.18 0.03 − 0.31 − 0.60 97.29*** 3044
Latvia 1.18 0.04 0.48 − 0.48 198.24** 4089 Morocco 1.16 0.02 − 0.26 0.44 73.12*** 3567
Journal of Quantitative Economics (2022) 20:337–377
 Table 3  (continued)
Country Mean S.D Skew Kurto JB Test Obs Country Mean S.D Skew Kurto JB Test Obs

Lithuania 1.18 0.04 1.34 1.27 1508*** 4089 Namibia 1.13 0.02 − 0.09 − 0.25 13.37*** 3030
Luxemborg 1.16 0.05 0.55 − 0.61 293.2*** 4349 Nigeria 1.16 0.04 − 0.40 − 0.49 161.65** 4349
Malta 1.17 0.04 1.56 2.21 2661.8** 4349 Romania 1.23 0.05 − 0.90 0.82 767.35** 4684
Netherland 1.15 0.03 0.36 0.10 125.2*** 5655 SAf 1.16 0.03 0.66 0.01 385.27** 5265
Norway 1.17 0.03 0.23 − 0.48 98.69*** 5133 Tanzania 1.18 0.06 0.08 − 0.95 89.17*** 2288
Belgium 1.15 0.03 − 0.40 0.14 122.5*** 4349 Tunisia 1.21 0.05 0.75 − 0.31 425.67** 4278
Poland 1.14 0.03 − 0.54 − 0.22 290.3*** 5544 Peru 0.78 0.53 − 0.36 − 1.70 805.75** 5655
Portugal 1.16 0.04 0.43 − 0.55 256.1*** 5655 Jamaica 1.18 0.05 − 1.05 0.49 1111.9** 5655
Slovakia 1.24 0.05 0.04 − 0.98 176.7*** 4349 Mexico 1.18 0.03 0.12 − 0.57 91.97*** 5642
Slovenia 1.14 0.05 0.92 0.10 467.5*** 3243 Panama 0.90 0.28 − 0.57 − 1.44 794.14** 5635
Spain 1.16 0.03 − 0.05 − 0.60 86.81*** 5655 Argentina 1.14 0.13 − 2.66 5.94 15,030** 5655
Journal of Quantitative Economics (2022) 20:337–377

Sweden 1.15 0.04 0.08 − 0.64 103.7*** 5655 Brazil 1.15 0.03 0.14 − 0.51 81.03** 5655
Switzerland 1.15 0.03 0.21 0.30 65.84*** 5655 Colombia 1.17 0.03 − 0.04 − 0.99 154.5*** 3698
UK 1.15 0.04 0.56 0.02 303.6*** 5655 Venezuela 1.07 0.28 − 2.26 4.16 8935.8** 5655
Canada 1.17 0.04 − 0.29 − 0.50 143.3*** 5655 Egypt 1.08 0.29 − 2.36 3.89 7219.5** 4610
Bermuda 1.17 0.05 − 0.92 1.21 1123.9** 5544 Russia 1.21 0.03 0.01 − 0.06 0.96*** 4684
USA 1.15 0.05 0.27 − 0.70 188.9*** 5655 Turkey 1.18 0.03 0.69 0.83 619.1*** 5655
Chile 1.18 0.04 0.09 − 0.89 195.7*** 5655 Bangladesh 1.19 0.04 − 0.05 0.21 7.27** 2785
Australia 1.14 0.03 − 0.01 − 0.06 1.052** 5655 CostaRica 1.02 0.201 − 2.35 6.59 15,424** 5628
NeZealand 1.16 0.02 − 0.08 − 0.31 20.87*** 3827
Iceland 1.16 0.04 0.39 1.16 468.8*** 5655
Cyprus 1.13 0.09 − 1.35 1.39 1108.8** 2870

Note: Panel A and Panel B report the descriptive statistics of the approximate entropy for the DMs and EMs. We follow IFC to classify the sample markets into DMs
and EMs based on the level of per capita gross national income (PGNI). SD denotes the standard deviation, and JB indicates Jarque–Bera normal test. Skew and Kurt are
skewness and kurtosis, respectively. *** and ** denote significance at 1% and 5% level, respectively.
367

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368 Journal of Quantitative Economics (2022) 20:337–377

Fig. 10  Cluster specification test. Note: The three statistics specify the robust number of clusters as 2 for
the sample

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Journal of Quantitative Economics (2022) 20:337–377 369

Fig. 11  Evolution of stock market efficiency in developed markets (100 random sequences). Note: Figure
presents the degree of time-variation in the efficiency level of developed markets measured by entropy in
the 100 random sequences

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370 Journal of Quantitative Economics (2022) 20:337–377

Fig. 12  Evolution of stock market efficiency in developed markets (150 random sequences). Note: Figure
presents the degree of time-variation in the efficiency level of developed markets measured by entropy in
the 150 random sequences

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Journal of Quantitative Economics (2022) 20:337–377 371

Fig. 13  Evolution of stock market efficiency in developed markets (300 random sequences). Note: Figure
presents the degree of time-variation in the efficiency level of developed markets measured by entropy in
the 300 random sequences

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Fig. 14  Evolution of stock market efficiency in emerging markets (100 random sequences). Note: Figure
presents the degree of time-variation in the efficiency level of emerging markets measured by entropy in
the 100 random sequences

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Journal of Quantitative Economics (2022) 20:337–377 373

Fig. 15  Evolution of stock market efficiency in emerging markets (150 random sequences). Note: The
figure presents the degree of time-variation in the efficiency level of emerging markets measured by
entropy in the 150 random sequences

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374 Journal of Quantitative Economics (2022) 20:337–377

Fig. 16  Evolution of stock market efficiency in emerging markets (300 random sequences). Note: Figure
presents the degree of time-variation in the efficiency level of emerging markets measured by entropy in
the 300 random sequences

Acknowledgements We the anonymous reviewer for the most insightful comments and suggestions,
especially the novel perspectives on AMH and entropy. We especially thank the patience of the reviewer,
Editor, and staff of the journal for the flexible approach during the COVID-19 pandemic. Any errors
are our own. The paper is based on the PhD work of the first author. We thank the participants of 26th
Annual Conference of the American Society of Business and Behavioral Sciences held at Las Vegas and
8th International Conference on Economics and Finance Research at Lyon.

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Journal of Quantitative Economics (2022) 20:337–377 375

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