On equity market inefficiency during the COVID-19 pandemic

Document Type

Article

Publication Date

10-1-2021

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.

Identifier

85109107126 (Scopus)

Publication Title

International Review of Financial Analysis

External Full Text Location

https://doi.org/10.1016/j.irfa.2021.101820

ISSN

10575219

Volume

77

Grant

18-01137S

Fund Ref

Grantová Agentura České Republiky

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