On equity market inefficiency during the COVID-19 pandemic

Robert Navratil; Stephen Taylor; Jan Vecer

doi:10.1016/j.irfa.2021.101820

On equity market inefficiency during the COVID-19 pandemic

Robert Navratil, Stephen Taylor, Jan Vecer

MT School of Management

Research output: Contribution to journal › Article › peer-review

12 Scopus citations

Abstract

We show that during the weeks following the initiation of the COVID-19 pandemic, the United States equity market was inefficient. This is demonstrated by showing that utility maximizing agents over the time period ranging from mid-February to late March 2020 can generate statistically significant profits by utilizing only historical price and virus related data to forecast future equity ETF returns. We generalize Merton's optimal portfolio problem using a novel method based upon a likelihood ratio in order to construct a dynamic trading strategy for utility maximizing agents. These strategies are shown to have statistically significant profitability and strong risk and performance statistics during the COVID-19 time-frame.

Original language	English (US)
Article number	101820
Journal	International Review of Financial Analysis
Volume	77
DOIs	https://doi.org/10.1016/j.irfa.2021.101820
State	Published - Oct 2021

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

Keywords

Efficient market hypothesis
Merton's optimal portfolio
Utility maximization

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10.1016/j.irfa.2021.101820

Cite this

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title = "On equity market inefficiency during the COVID-19 pandemic",

abstract = "We show that during the weeks following the initiation of the COVID-19 pandemic, the United States equity market was inefficient. This is demonstrated by showing that utility maximizing agents over the time period ranging from mid-February to late March 2020 can generate statistically significant profits by utilizing only historical price and virus related data to forecast future equity ETF returns. We generalize Merton's optimal portfolio problem using a novel method based upon a likelihood ratio in order to construct a dynamic trading strategy for utility maximizing agents. These strategies are shown to have statistically significant profitability and strong risk and performance statistics during the COVID-19 time-frame.",

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author = "Robert Navratil and Stephen Taylor and Jan Vecer",

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AU - Vecer, Jan

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AB - We show that during the weeks following the initiation of the COVID-19 pandemic, the United States equity market was inefficient. This is demonstrated by showing that utility maximizing agents over the time period ranging from mid-February to late March 2020 can generate statistically significant profits by utilizing only historical price and virus related data to forecast future equity ETF returns. We generalize Merton's optimal portfolio problem using a novel method based upon a likelihood ratio in order to construct a dynamic trading strategy for utility maximizing agents. These strategies are shown to have statistically significant profitability and strong risk and performance statistics during the COVID-19 time-frame.

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JO - International Review of Financial Analysis

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ER -

On equity market inefficiency during the COVID-19 pandemic

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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