A new measure of market inefficiency

Christopher R. Stephens, Harald Benink, J.L. Gordillo, Juan Pablo Pardo-Guerra

Research output: Contribution to journalArticleScientificpeer-review


Financial crises, such as the Great Financial Crisis of 2007–2009 and the COVID-19 Crisis of 2020–2021, lead to high volatility in financial markets and highlight the importance of the debate on the Efficient Markets Hypothesis, a corollary of which is that in an efficient market it should not be possible to systematically make excess returns. In this paper, we discuss a new empirical measure—Excess Trading Returns—that distinguishes between market and trading returns and that can be used to measure inefficiency. We define an Inefficiency Matrix that can provide a complete, empirical characterization of the inefficiencies inherent in a market. We illustrate its use in the context of empirical data from a pair of model markets, where information asymmetries can be clearly understood, and discuss the challenges of applying it to market data from commercial exchanges.
Original languageEnglish
Article number263
JournalJournal of Risk and Financial Management
Issue number6
Publication statusPublished - Jun 2021


  • efficient market hypothesis (EMH)
  • excess trading returns
  • investor's behaviour
  • behavioural finance


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