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

Int Rev Financ Anal. 2021 Oct:77:101820. doi: 10.1016/j.irfa.2021.101820. Epub 2021 Jul 2.

Authors

Robert Navratil¹, Stephen Taylor^{1

2}, Jan Vecer^{1

3}

Affiliations

¹ Charles University, Department of Probability and Statistics, Faculty of Mathematics and Physics, Sokolovska 83, 18675 Praha 8, Czech Republic.
² School of Management, New Jersey Institute of Technology, Newark, NJ 07102, United States of America.
³ Frankfurt School of Finance and Management, Adickesallee 32-34, 60322 Frankfurt am Main, Germany.

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.

Keywords: Efficient market hypothesis; Merton’s optimal portfolio; Utility maximization.