Are European banks informationally weak-form efficient? A dynamic analysis

Abstract

The efficient market hypothesis (EMH) is a cornerstone of financial theory and is crucial to understanding weak-form efficiency, particularly during extreme events. Detrended fluctuation analysis (DFA) is a robust approach for assessing weak-form efficiency, overcoming some limitations of traditional methods. Given the fundamental role of the banking sector in the economy and its importance during crises, evaluating informational efficiency in this sector becomes even more relevant. In the present study, we applied the DFA with sliding windows to assess the weak-form efficiency in the stock returns of the European banking sector between February 2016 and February 2023 and the efficiency index of Kristoufek and Vosvrda (2013) to rank the weak-form efficiency levels of the analyzed banks. The results indicate that the COVID-19 pandemic increased bank return persistence. In contrast, the Russia–Ukraine war initially led to antipersistent behavior, but banks returned to persistent patterns over time. The efficiency ranking revealed that banks from Belgium, the UK, Spain, and Sweden were less inefficient, whereas those from France and Italy presented higher levels of inefficiency. The findings provide valuable insights for investors and policymakers regarding the development of risk mitigation strategies, risk management, and financial stability efforts.