What do we know about informational efficiency? Three puzzles and the new direction forward

Abstract

Informational efficiency generally indicates the prevailing market price of assets by focusing on the connection between market participants in reacting to the arrival of new information. However, several authors have suggested that uncorrelated trading strategies across markets are meant for traders who genuinely know the best. Our study aims to survey the most recent literature on informational efficiency. We examine the empirical literature on informational efficiency by discussing the findings from dual perspectives, namely price–volume and spot–futures relations. More research needs to be directed toward understanding how market efficiency responds to impending uncertainties in the real economy. By combining the findings of 109 studies from different financial markets, we discuss essential lessons from market microstructures and behavioral biases in decision‐making. Further, we identify three contentious issues yet to be explored in the literature. This study concludes by discussing a new direction for future research.

Price Efficiency in Emerging Equity Markets during Recent Crises Periods: Empirical Evidence from Equity Markets in BRICS Countries

“…Investors may continue to re-estimate the equities' future prices, which can serve as an intuitive forecast of the spot price in the wake of the global financial crisis as they work on their strategies and make investment decisions. Consequently, it is crucial to concentrate on the appropriate period for each occurrence when analyzing data about short-term changes in spot and futures prices (Go and Lau, 2021). We can provide a comprehensive snapshot of the price efficiency of the observed equity markets instead of focusing on individual price changes.…”

The effectiveness of crude oil futures hedging during infectious disease outbreaks in the 21st century

“…Initial research on the estimation of the optimal hedge ratio assumed that the return variance is time‐invariant (Ederington, 1979; Hill & Schneeweis, 1981). This classical assumption, however, is impractical in contemporary crude oil futures trading due to various market frictions including thin trading, inadequate inventory, and seasonality in production and consumption (Go & Lau, 2021). To improve the hedging performance of futures contracts, both academics and practitioners use time‐varying variance–covariance matrices to determine the optimal hedge ratio (Baillie & Myers, 1991; Chun et al, 2019; Myers, 1991; Poomimars et al, 2003; Switzer & El‐Khoury, 2007; Xu & Lien, 2020).…”

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“…Some returns are at the discretionary of the middle man and resulting into ballooning of commissions. Side-jobber locks the seller at his / her given price; such side-jobber is having much better information of the market [1]. This asymmetry of information in Conflict affected South Sudan is due to differences in education and market knowledge of the seller and the middlemen [2].…”