Article

Multifractal Detrended Fluctuation Analysis

(MF-DFA) of Stock Market Indexes. Empirical
Evidence from Seven Central and Eastern
European Markets
Laura Raisa Miloş 1,*, Cornel Haţiegan 2, Marius Cristian Miloş 1, Flavia Mirela Barna 1
and Claudiu Boțoc 1
1 Department of Finance, Faculty of Economics and Business Administration, West University of Timișoara,
16 Pestalozzi Street, 300115 Timișoara, Romania; [email protected] (M.C.M.); [email protected]
(F.M.B.); [email protected] (C.B.)
2 Departament of Engineering Science, Faculty of Engineering and Management, University “Eftimie

Murgu” of Resita, 1-4 Traian Vuia Square, 320085 Resita, Romania; [email protected]
* Correspondence: [email protected]

Received: 01 November 2019; Accepted: 09 January 2020; Published: 10 January 2020

Abstract: In this paper, we present a comparative investigation of the multifractal properties of

seven Central and Eastern European (CEE) stock markets using recent financial data up to August
2018 by employing seasonal and trend decompositions before applying multifractal detrended
fluctuation analysis. We find that stock indices returns exhibit long-range correlations, supporting
the idea that the stock markets in question are not efficient markets and have not reached a mature
stage of market development. The results of the paper are of interest to investors looking for
opportunities in these stock exchanges and also to policy makers in their endeavour of realizing
institutional reforms in order to increase stock market efficiency and to support the sustainable
growth of the financial markets.

Keywords: econophysics; MF-DFA; long-range dependency; generalized Hurst exponent; market

efficiency; sustainable development; stock markets

1. Introduction
In its list of recommendations to accelerate capital market development in emerging economies,
the World Economic Forum suggested stock market efficiency and transparency, with the objective
of creating more liquidity in the market and improving the ability of market participants to assess
market’s costs and benefits [1]. The issue of market efficiency has attracted a lot of academic interest
in the past fifty years, with application to individual or regional stock markets, due to its implications
for both investors and public authorities. Investors looking for fair prices will avoid investing in
inefficient markets, while other investors looking for mispriced assets in equity markets will avoid
efficient markets since they do not provide the opportunity for realizing abnormal profits. Public
authorities, on the other hand, will continue their efforts in realizing reforms, meant to enhance stock
market efficiency, in order to ensure that all financial assets are offering optimal risk-to-reward ratios
[2]. Understanding the behavior of developing stock markets is very important when adopting the
right public policies in order to enhance the role of the stock exchange in the sustainable development
of the economy. The positive influence of the market-based economy on the economic growth is well
documented in the literature [3–6] despite some studies which prove the contrary [7] or suggest that
causality flows in the opposite direction [8,9]. A more efficient financial system will enhance GDP
Sustainability 2020, 12, 535; doi:10.3390/su12020535 www.mdpi.com/journal/sustainability
Sustainability 2020, 12, 535 2 of 15

growth. Consequently, policymakers will make all necessary efforts to minimize market failures by
making transactions and capital allocation easier and exerting corporate governance principles
[10,11]. On the other hand, understanding the current degree of market efficiency of the CEE
countries, which are the latest members of the European Union, becomes more important in the
context of their integration with other developed markets [12].
The efficient market hypothesis (EMH), as defined in the pioneering work by Fama [13],
presumes that all information available on the market will be immediately reflected in the asset
prices, making them fair. An emerging stream of financial literature nowadays criticizes the EMH as
this assumption fails to explain ubiquitous market properties such as fat tails, long-term correlation,
volatility clustering, and multifractality. In this respect, fractal theory has been proposed whereas
fractal distribution was found as applicable to financial markets [14]. Fractal methods consist of single
fractal and multifractal methods, the latter being superior given that they can describe the multi-scale
and subtle sub-structures of fractals in complex systems. Multifractal detrended fluctuation analysis
(MF-DFA) was developed in order to investigate the dynamic resources of multifractality (non-linear
temporal correlation versus fat-tailed distribution) [15]. The application area for MF-DFA is
widespread in several markets described by the random walk hypothesis (RWH). On the one hand,
MF-DFA has been applied to agricultural or commodities markets such as oil or gold [16–18] and
suggests that prices do not follow RWH. On the other hand, it has been adopted in financial markets,
mostly capital markets [19–32], and suggests the existence of fractal properties. Due to the discovery
of multifractal properties of the financial markets in the last decade, interest in financial analysis of
stock markets using MF-DFA has increased. Today, multifractality is one of the most active topics in
econophysics. However, most studies using multifractality rather focus on developed stock markets.
The use of the technique for emerging CEE markets is uncommon [28–32], ignoring the potential to
highlight multifractal properties in these markets.
The purpose of the paper is to assess, using MF-DFA, the degree of market efficiency in the case
of the considered seven CEE countries, new members of the European Union (Bulgaria, Croatia,
Czech Republic, Hungary, Romania, Poland, and Slovenia). Using daily blue-chip index data up to
August 2018, our study examines the behavior of these stock markets over the long run. Our paper
fills the existing literature gap in several directions. First, from a theoretical point of view, it brings
further evidence for the efficiency of these markets, testing the weak form of market efficiency for the
most important CEE stock exchanges (in terms of market capitalization). Previous empirical literature
on this topic has failed to provide consistent results. Market efficiency, stock market development,
and economic growth are connected, and the CEE stock exchanges are all developing stock markets,
for which sustainable growth is highly important, as shown in the literature [6]. Second, our
methodology improves previous studies in the sense that this is the first stock market study that
employs STL (seasonal and trend decomposition using loess) decomposition, before applying MF-
DFA. Isolating the remaining components allows us to exclude the seasonal oscillations that could be
generated by the annual and sub-annual trading cycles.
The rest of the paper is structured as follows: Section 2 reviews the literature and background of
the topic. Section 3 presents data and methodology. Section 4 outlines the empirical results, and
Section 5 concludes.

2. Theoretical Background
The beneficial role of stock exchanges in ensuring long-run economic growth and sustainable
development is well known in both the financial and growth literature. This relationship is mainly
explained by higher domestic capital accumulation and mobilization, capital channelling towards
productive sectors, risk transfer, and sharing and price discovery [3–5]. There are also studies that
outline the reverse causality relationship between financial development and growth [8,9] while
others support the unpopular belief that market-based financial development and economic growth
do not share a causal relationship [7].
However, most empirical research suggests a one-way positive connection between stock
market development and economic growth [3–5]. This positive relationship should persist even if, in
Sustainability 2020, 12, 535 3 of 15

the case of the new member states of European Union, the contribution of the stock markets to
economic growth is limited due to the small financial depth of the markets [6]. However, in these
countries, the potential role that the stock market has for economic development depends on the
degree of stock market development. Stock market development, in turn, has been proven to have, a
significant relationship with the degree of market efficiency, regardless of whether markets are
developed, frontier or emergent, at least in the case of Europe [33]. Younger and less developed
markets are usually found in the empirical literature to be less efficient than their more developed
counterparts. Lower degrees of efficiency imply also higher transaction costs for market participants
[24,34].
The efficient market hypothesis [13] divides itself into the well-known categories: (i) the weak
form, which states that no analysis of past stock market behavior (technical or fundamental) would
allow market participants to obtain abnormal returns, due to the fact that all historical and current
data about price and volume would already be accounted on the market price; (ii) the semi-strong form,
which can be differentiated by the latter in the sense that the market value of a financial asset adjusts,
almost immediately, to all new (market and non-market) public information about it, following a
random walk departure from previous prices; (iii) the strong form, which assumes that not even
privileged information (insider information) made public to a certain group would allow a certain
investor to gain abnormal profits.
A comprehensive list of studies which cover stock market efficiency is beyond the purpose of
our study. We provide instead an overview of recent empirical work that focuses on testing the weak
form of efficient markets in the case of several CEE stock markets. A sound empirical literature
background regarding the efficiency of the emerging markets prior to 2011 can be found in Dragotă
and Țilică [35] or Nurunnabi [36]. These studies aimed at testing the weak form of efficient market
theory (the data necessary for testing strong market efficiency or semi-strong market efficiency being
probably in most cases unavailable [24]) and failed to provide an unequivocal response regarding
market efficiency for the CEE stock markets. There are serious doubts about whether stock markets
are efficient in these countries [35]. This might be since the stock market efficiency is time varying
[37]. In this case, using a rolling regression approach can help in analyzing the efficient markets
hypothesis [38]. Furthermore, there is a long memory property in some CEE stock markets [39] that
is not consistent with efficiency.
We will further discuss recent empirical tests of the weak form of efficiency in CEE stock markets
(starting with 2011), which also failed in providing a unanimous response. The methodology of these
tests was based on one or more of the following traditional techniques: the Jarque–Bera (JB) test
(which measures the normality of the distribution), the parametric autocorrelation test (which
measures the dependency of successive returns), the non-parametric runs test (which tests the
randomness of a sequence of returns), the variance ratio test (which determines whether there are
any uncorrelated changes in the series), unit root tests (meant to assess the stationarity of time series
data), or GARCH and its variations (for the analysis of seasonality patterns: January effects, day of
the month, turn of the month, day of the week or other).
Smith [34] found evidence for the weak form of efficiency when testing the Martingale
hypothesis for 15 European emerging stock markets over a period of almost 9 years (February 2000–
December 2009). The author used a rolling window variance ratio to capture changes in efficiency
and to rank markets according to their relative inefficiency, reaching the conclusion that return
predictability varies widely between the countries. The most efficient markets he studied were the
Hungarian and the Polish markets, while Estonia was less efficient.
Guidi et al. [2] used autocorrelation analysis, the runs test, the variance ratio test, and GARCH-
M for a period of ten years (1999–2009) to empirically prove that the seven CEE stock markets taken
into consideration did not follow a random walk process. However, the authors found that since
2004, the year of accession to the European Union, CEE countries have improved their stock market
efficiency. The random walk hypothesis was rejected for two of the seven considered stock markets
(the Bulgarian and Slovak markets).
Sustainability 2020, 12, 535 4 of 15

Karadagli and Omay [40] investigated the weak form of market efficiency for emerging
economies (including some of the countries taken into consideration in our analysis) using linear and
nonlinear unit root tests, which provided contradictory results, while using monthly data for the
period 2002–2010. The results provided by nonlinear unit root tests suggested that the Romanian
market and the Polish market were not weak-form efficient, while the linear tests suggested they
were, alongside other CEE stock markets such as Bulgarian, Hungarian, and Slovenian markets. As
a group, however, the authors found that the considered countries were not efficient.
Dragotă and Tilică [35] investigated the degree of market efficiency in the case of 20 East
European former communist countries for the period 2008–2010, posing some doubts about market
efficiency for all the considered countries, regardless of the type of methodology used (unit root tests,
runs test, variance ratio test, filter rules test, or the January effect). They also suggested that the
established degree of efficiency could serve as a method of selection between active and passive
strategies on the market. This hypothesis was stated in Kroha and Skoula [41], who developed a new
technical indicator for trading strategies (for buying and selling signals), called Moving Hurst (MF).
Boțoc [12] examined the weak form of market efficiency for five CEE stock markets in the
timeframe of 1997–2014 (Croatia, Czech Republic, Hungary, Romania, and Poland), using unit root
tests, a non-parametric runs test, and joint variance tests and found, with the exception of Poland,
Hungary, and Croatia, that the CEE markets did not exhibit weak-form market efficiency.
Tokić et al. [24] analysed financial markets in four CEE countries (Croatia, Serbia, Slovenia, and
Slovakia) for a significant timeframe (2006–2016) and show that all analysed indices, with the
exception of Serbia, exhibited weak-form market efficiency. These results, in contrast with other
empirical papers on the same markets, were justified by the authors by the possibility that market
efficiency evolves positively over time with the level of stock market development.
As a response of econophysics literature to both EMH and RWH, the fractal theory was proposed
by Benoit Mandelbrot and further developed [14,42]. The theory, originating from mathematics,
present fractals as fragmented geometric shapes that when broken into parts, are similar in shape to
the whole. It has started to be used as an alternative to standard tools and methods previously used
in the world of finance in general and financial markets in particular. This is due to the shortcomings
of GARCH processes or Brownian motion, which failed to model all relevant features of financial
markets [42]. The fractal theory, also known as the theory of “roughness and self-similarity” was
applied to the behavior of financial markets in connection with market efficiency, as a non-linear
approach. Kantelhardt et al. [15,43] suggested MF-DFA in analyzing non-stationary time series.
The empirical literature investigating financial market behavior has concluded that there are
main two factors leading to multifractal properties of financial time series: non-linear time
correlations between past and current events and heavy-tailed probability distributions [18]. A large
body of empirical research has proven that multifractality exists in stock market indices, the Hurst
exponent being generally used to monitor the highest volatility periods in financial time series [44]
or to measure the short and long-term memory of the stock market depicting the degree of market
efficiency [28,45,46].
Given the rich literature related to using detrended fluctuation analysis (DFA) and its variations
in financial markets (mostly developed ones), we will further limit our empirical literature review to
those studies that have used MF-DFA with application to one or more of the CEE stock markets taken
into consideration in our analysis.
Jagric et al. [28] used wavelet analysis and estimated the Hurst exponent on a sliding time
window to test the existence of long-range dependence (LRD) in six transition economies. They
divided their results into two groups: markets with strong LRD (Czech Republic, Hungary, Russia,
and Slovenia) and markets with a weak form of LRD (Poland, Slovakia) while also finding evidence
for the time dependence of the Hurst coefficient.
Domino [29] analyzed a large number of stocks from the Warsaw Stock Exchange (126
companies) during the period 1991–2008 and computed the Hurst exponent in order to search for the
moment when changes in the long-term return rate of an investment were more likely to occur, in a
Sustainability 2020, 12, 535 5 of 15

way that could be used in an investment strategy. He concluded that a dropping Hurst exponent
could be regarded as a signal for a potential change in the trend or in the return.
The informational efficiency of the Romanian stock market was analysed using MF-DFA by
Pleșoianu et al. [30] in the case of the blue-chip Bucharest Exchange Trading (BET) and the composite
BET-C index, as well as ten different stocks listed on the Bucharest Stock Exchange. Using daily time
series from January 2001 until May 2012, as well as intradaily time series that ranged from January
2011 until December 2011, they confirmed the multifractal nature of this market, as well as its
predictable nature.
Caraiani [31] tested for the presence of multifractality in three important CEE stock markets
(Polish, Czech, and Hungarian) using MF-DFA. Using both original return time-series for the blue-
chip indexes WIG, BUX, and PX (up to December 2010) and reordered (reshuffled) time series, he
indicated the long-run dependence of these markets. He also tested whether the degree of
multifractality changed during the financial crisis period. During this period, he found no evidence
of an increase of multifractality spectrum strength, but rather of its shape.
Ferreira [32] investigated the behavior of 18 Eastern European stock markets using a sliding
window DFA (with data ending in March 2017) and found that most of the considered markets were
long-range dependent, suggesting a market inefficiency. One important conclusion of their paper has
to do with the evolution in time of the dependence levels observed for the Czech, Hungarian, and
Polish stock markets. These dependence levels were descending, even better than the benchmark
indexes for the developed markets. The markets were ranked, with the help of an efficiency index,
modeled after the one proposed by Kristoufek and Vosvrda [45]. The most efficient markets were
Czech Republic, Hungary, and Poland.
To conclude, we can say that most of the studies applying MF-DFA, but also other traditional
tools in order to test weak-form market efficiency in the case of CEE stock markets, suggest that these
stock exchanges are inefficient, with some exceptions. These exceptions might be caused either by the
type of methodology used or by the time horizon. However, these empirical results must be treated
with caution, since market efficiency could increase or decrease over time (time-varying market
efficiency) due to various factors including the level of stock market development [47]. Moreover,
although MF-DFA is a well-known methodology, it is not that widely applied in the case of the CEE
countries, so there is still a basis for rigorous testing in order to understand better the market
behavior.

3. Data and Methodology

Data regarding the daily values of CEE stock market indices (up to August 2018) as well as data
regarding market capitalization were obtained from Investing.com, CEIC, and the World Federation
of Exchanges (Table 1). The seven CEE stock markets included in our analysis were the top ones in
term of market capitalization when considering the new member states of the European Union.

Table 1. Stock markets considered in the analysis.

Stock Market
Stock Market Beginning
Country Capitalization (2018) Observations
Index Date
Bill. USD % GDP
Poland 170.2 29% WIG-20 23. 01. 2001 4383
Czech
44.99 18% PX 07. 04. 1994 6047
Republic
Romania 28.90 19% BET 19. 09. 1997 5290
Croatia 20.90 9% CROBEX 23. 01. 2001 4383
Hungary 20.50 34% BUX 05. 01. 2004 3663
Bulgaria 15.16 23% SOFIX 16. 08. 2011 1741
Slovenia 7.26 13% SBI-TOP 05. 04. 2006 3092
Source: Authors.
Sustainability 2020, 12, 535 6 of 15

The time-series analysis of stock market returns consists of three stages. In the first step, we
calculate stock market returns. In the second step, we apply seasonal and trend decompositions (STL)
to isolate deterministic components. Finally, we apply multifractal detrended fluctuation analysis
(MF-DFA) to the stochastic component of the financial return series.

3.1. Stage 1: Calculating Stock Market Returns

Let Pt be the index price at the end of period t. The simple return on that index over period t, rt,
is given by:
P − Pt − 1
rt = t (1)
Pt − 1

The log-return on that index over period t, rL, is given by:

𝑃
𝑟 = log( ) (2)
𝑃
In our study, we use daily simple returns. Because of the daily frequency of our data, the results
of the analysis based on simple and log returns are very close. For coarser data, the use of log-returns
is advised because simple returns do not additively compound over time.

3.2. Stage 2: STL Decomposition

Using the Wold representation theorem [48], stock returns can be decomposed into deterministic
and stochastic components. Because we are interested in the behavior of the stochastic component,
we first decompose the time series of calculated stock returns (1) into deterministic and stochastic
components. For this purpose, we use an STL (seasonal and trend decomposition using loess)
decomposition based on the loess smoother, proposed by [49]. The STL method additively
decomposes each stock return time series into a deterministic trend (Ti), seasonal (Si) components,
and stochastic remainder (Ri) component, as in [50]:
rt = T i + S i + R i (3)
The STL decomposition consists of three steps. In the first step, the trend component is
initialized. The next two steps are two recursive procedures: an inner loop as well as an outer loop.
The outer loop calculates robustness weights according to the remainder component. These weights
are subsequently used in the next iteration of the inner loop. The outer loop role is reducing (or, in
some instances, eliminating) outliers and extreme values in the time series. The inner loop corrects
the trend and seasonal components [50]. The time series is then partitioned into cycle subseries which
are loess (LOcalregrESSion) smoothed and then passed through a low-pass filter. The resulting
seasonal components are subtracted from the raw data. The residual is loess smoothed, and the trend
is re-initialized. What is left is the remainder that subsequently enters the outer loop.
To our knowledge, this is the first stock market study that employs STL decomposition before
applying the MF-DFA. Isolating the remaining components allows us to exclude the seasonal
oscillations that could be generated by the annual and sub-annual trading cycles. We have applied
the STL decomposition with the scope of removing the seasonal components and benefiting from
more reliable results but also to have information on the inner dynamics of stock market returns, as
suggested by [51]. STL has several important advantages compared to other time series
decomposition methods, such as TRAMO/SEATS [52] and X11 [53]. First, STL can handle any type of
seasonality (not only monthly and quarterly data). Second, its seasonal component is allowed to
change over time. Third, the user can specify both the rate of change in the seasonal component and
the smoothness of the trend cycle. Finally, the method is more robust to outliers.
In this study, the STL decomposition is implemented in the R statistical package using the stl
function of the stats library [51,54]. We set the function parameters as follows: (i) the span of the loess
window for seasonal extraction (s.window) is set to 21 (i.e., the number of trading days in a calendar
month); (ii) the number of backfitting iterations (inner) is set to 1; (iii), the number of outer iterations
Sustainability 2020, 12, 535 7 of 15

(outer) is set to 15; (iv) the degree of locally-fitted polynomial in seasonal extraction (s.degree) is set
to 1; the other parameters are left as default. The parameter choices in (ii) and (iii) are robust iteration
options necessary to minimize effects of outliers, and (iv) is necessary for better handling of seasonal
effects.

3.3. Stage 3: MF-DFA

The multifractal detrended fluctuation analysis (MF-DFA) is the strongest technique for
detecting multifractality in a time series [51]. It takes the average volatility of the time series in each
interval as a statistical point that is subsequently used to calculate volatility functions. It then
determines generalized Hurst exponents based on the power law of volatility functions [55]. The
important advantage of MF-DFA over other approaches is its ability to detect long-term correlations
in non-stationary time series. Below we outline the key steps and formulas underlying the analysis.
Let R(i) for i = 1,⋯,N be a possibly non-stationary time series of the remainder component
resulting from the STL decomposition of stock market returns (2), where N indicates series length.
The first step of the MF-DFA is to construct the “profile”, Y(j), by integration after subtracting from
the time series, R(i) its average, R [51]:
j
Y ( j ) ≡  ( R(i ) − R ), i = 1,..., N (4)
i =1
The second step of the MF-DFA is to divide the profile Y(j) into Ns ≡ int (N/s) non-overlapping
segments of equal length s. Observe that time scale N is not usually an integer multiple of length s.
Therefore, one can disregard a short part of the profile Y(j) at the end, and the sub-division is also
realized starting from the opposite end. As a result, a total of 2 Ns segments is obtained.
In the third step of MF-DFA, we compute the local trend for each of the 2Ns segments by a least-
squares fit of the series. This involves fitting a polynomial of degree m to approximate the profile in
each of the 2Ns windows. The variance is then calculated using the following formulas:

1 s
F 2 ( s, v) =  {Y [(v − 1) s + j ] − yv ( j )} (5)
s j =1

for each segment ν, ν = 1,⋯,Ns, and

1 s
F 2 ( s, v) =  {Y [(v − N s ) s + j ] − yv ( j )} (6)
s j =1

for ν = Ns+1,⋯,2Ns, where yv ( j) is the polynomial fit in segment v.

The fourth step of the MF-DFA involves averaging over all segments from the second step to
obtain the qth-order fluctuation functions
1q
 1 2 q 2
Fq ( s) =  v2 N s [ F ( s, v)]  if q ≠0 (7)
 2 N s 
And

 1 
Fq ( s ) =  2
 v2 N s ln[ F ( s , v )] if q =0 (8)
 4 N s 
The parameter q helps distinguishing between segments with small and large fluctuations. The
negative value of the q parameter enhances the small fluctuations, whereas a positive one enhances
the large fluctuations. For q = 2, we have a special case of a well-known detrended fluctuation analysis
[56]. Observe that Fq(s) is an increasing function of s.
Sustainability 2020, 12, 535 8 of 15

In the final step we determine the scaling exponent of the fluctuation function for any fixed q
and obtain the relationship between Fq(s) and s. If Fq(s) is a power law, the series are in the log-log
scale for that particular q:
h
Fq ( s ) ∝ s q (9)

The exponent hq is called a generalized Hurst exponent. In the special case of stationary series, h2
becomes the well known Hurst exponent [57]. One can use the Hurst exponents in order to measure
market efficiency [23,45,46,58]. A Hurst exponent value that ranges between 0.5 and 1 would imply
a positive autocorrelation (a persistent behavior), characterized by long memory effects, which occur
regardless of the time scale. Values closer to 1 indicate the presence of large and abrupt changes. A
Hurst exponent value that ranges between 0 and 0.5 indicates negative autocorrelation—a change of
the trend (an anti-persistent behavior) [41]. Antipersistence means to cover less distance, by reverting
itself more frequent than a random process. According to Peters [59], a value of H equal to 0.5 (q = 0)
reflects a Brownian time series or otherwise, a classical random walk.
Generally speaking, the series is characterised by multifractality if the exponent hq depends on
q, and it monotonically decreases as q increases. The series is mono-fractal when hq does not depend
on q [51].
The hq resulting from MF-DFA can also be expressed as a function of the Renyi exponent, τ (q)
:
τ ( q ) = qhq − 1 (10)

Another illustrative way to analyze whether the time series is mono- or multifractal is by the
multifractal spectrum:

f (α) = qα −τ (q) (11)

where α is the Hölder exponent:

∂hq
α = hq + q −τ (q) (12)
∂q
The multifractal spectrum shows the importance of each of the various fractal exponents in the
series. Finally, the range of generalized Hurst exponents, Δh = max(hq ) − min( hq ), is another
helpful measure of the degree of multifractality. A higher Δ h indicates a more multifractal series.

4. Results
Figure 1 presents, by way of illustration, the three constituent elements for the Romanian stock
market index, BET: the seasonal (Figure 1b), trend (Figure 1c), and remainder (Figure 1d). The results
of STL decomposition of other stock returns time series are similar and are available in the
Supplementary Materials (due to space constraints). In Figure 1, there can be noticed the annual
oscillation that characterizes the seasonal component, which is consistent with earlier findings that
stock market returns have a clear seasonal pattern [60]. On the contrary, the trend component does
not show a large temporal evolution of stock index returns, and the range of variability is very small
(i.e., its coefficient of variation is close to zero). The remainder does not follow a regular pattern,
experiencing high frequency fluctuations, that could be explained by other macroeconomic
determinants, such as, e.g., the financial crisis of 2008–2009 [61,62]. The remaining component
presents a noisy character which is not, however, a pure random noise. As we show below, the
application of MF-DFA to the remainder ensures capturing the dynamic characteristics of the inner
fluctuations of the stock returns.
Sustainability 2020, 12, 535 9 of 15

Figure 1. STL decomposition of stock returns time series (Romanian stock market index, BET). (a): the
original time series, (b): seasonal component, (c): trend component, (d): remaining component.
Source: Authors.

We applied the MF-DFA to the remaining components of the stock market return time series for
seven CEE stock market indices. The analysis was implemented in R using the mfdfa library [63]. As
the time trend component was already isolated by the STL decomposition, for each of the stock
market index series, we selected the first-degree (i.e., m = 1) detrending polynomial in order to realize
the MF-DFA. The time scales ranged from 10 to N/5 days.
Figure 2 reveals, by way of illustration, the MF-DFA results for the remaining component of the
Romanian stock market index, BET (shown in Figure 1d). The MF-DFA results of other stock returns
time series are similar and are available in the Supplementary Materials. As can be seen in Figure 2,
the presence of scaling for any q is pointed out by the fluctuation functions, which are well fitted and
present a straight line in log–log scales. The Hurst exponent (H) is estimated with the help of F2. In
the case of stationary series, the Hurst exponent is computed by setting q = 2 for the scaling exponent.
In our case, H = 0.49, which suggests that there is a low persistence that characterizes the remaining
component.
Sustainability 2020, 12, 535 10 of 15

Figure 2. The MF-DFA results of stock returns time series (Romanian stock market index, BET). (a)
Fluctuation functions for q = −10, q = 0, q = 10. (b) Generalized Hurst exponent for each q. (c) Renyi
exponent, τ(q). (d) Multifractal spectrum. Source: Authors.

Figure 2b indicates the dependence of the generalized Hurst exponent with q. One can observe
that the function is decreasing, which proves the existence of patterns of multifractality in the time
fluctuations of the remainder. Figure 2c shows the Renyi exponent, τ(q). For monofractal series, τ(q)
is linear, while for multifractal series, it is nonlinear. We see that τ(q) has an exponential shape, which
indicates multifractality. Figure 2d shows the multifractal spectrum obtained from Equations (11)
and (12). Consistent with other indicators, the multifractal spectrum exhibits a single-humped shape,
usually describing the multifractal series. Finally, we calculate the range of generalized Hurst
exponents, Δ h . The range Δ h measures the level of multifractality, being known the fact that the
larger this range the more multifractality resides in the series [15]. For the Romanian stock market
index, we found Δ h = 0.22. Thus, the remainder of the stock market index is characterized by high
multifractality, the time dynamics being mostly governed by large volatility.
The examination of MF-DFA of the remaining components for the other six indices shows a
similar pattern. Table 2 summarizes the calculated generalized Hurst exponents for the seven CEE
stock indices over the range of q∈[−10,10] . We see that for all these indices, h(q) is a decreasing
function, which indicates the presence of multifractality in the time fluctuations of the remaining
component [51]. The range of generalized Hurst exponents, Δ h , is the widest for the Czech Republic
and Bulgarian indices (0.32 and 0.35, respectively), indicating the largest degree of multifractality,
and the narrowest for the Slovenian and Croatian indices (0.15 and 0.2, respectively), indicating the
smallest degree of multifractality. Furthermore, nonlinear temporal correlation represents the major
contribution in multifractality formation instead of a fat-tailed distribution.

Table 2. Generalized Hurst exponents for 7 CEE stock indices and their range over q ∈[−10,10].
Order q BUX PX WIG20 SOFIX SBI-TOP CROBEX BET
−10 0.58 0.65 0.56 0.70 0.61 0.66 0.58
−8 0.57 0.63 0.55 0.68 0.59 0.65 0.56
−6 0.55 0.60 0.53 0.66 0.57 0.63 0.55
Sustainability 2020, 12, 535 11 of 15

−4 0.53 0.57 0.51 0.64 0.54 0.60 0.53

−2 0.51 0.52 0.49 0.61 0.51 0.58 0.52
0 0.50 0.49 0.47 0.58 0.52 0.56 0.52
2 0.48 0.46 0.45 0.52 0.54 0.57 0.49
4 0.43 0.41 0.41 0.45 0.52 0.54 0.44
6 0.37 0.37 0.38 0.40 0.49 0.51 0.40
8 0.34 0.34 0.35 0.37 0.47 0.48 0.38
10 0.32 0.32 0.32 0.35 0.45 0.46 0.36
∆h 0.26 0.32 0.24 0.35 0.15 0.20 0.22
Source: Authors.

Comparing the results obtained for all seven stock market indices, keeping in consideration that
the efficiency of the stock markets is associated with their multifractal properties [62], the most
efficient stock market in this analysis is the Slovenian one, while the least efficient is Bulgaria. The
Romanian stock market is somewhere in the middle. These results are interesting given the domestic
market capitalization for the considered CEE markets, one of the usual indicators of stock market
development. The statistical data for 2018 [64] rank the Polish, Czech, and Hungarian stock markets
as the most developed, in terms of market capitalization, followed by Romania, Croatia, Bulgaria,
with Slovenia last.
Our results based on the classical Hurst exponent (q = 2) would point to the Polish, Czech,
Hungarian, and Romanian markets as being characterized by a negative autocorrelation (anti-
persistent fluctuations), meaning that an increase (decrease) in the previous period will be followed
by a decrease (increase) in the succeeding period. The other three markets (Bulgarian, Slovenian, and
Croatian markets) show a positive autocorrelation behavior (a consistent behavior), when an increase
(decrease) in the previous period would be followed by an increase (decrease) in the succeeding
period. Here, we could presume (without further evidence, that must be provided) that the level of
development of the CEE stock markets could have a role in the kind of efficiency behavior measured
by the Hurst exponent.
These results must be interpreted with caution, considering the well-known fact that the long
memory character of the time series changes with the length of time period used [61]. The few studies
that were realized with a sample of the CEE stock markets had different time frames. We can say,
however, that the results are in line with the previous findings [28–32] regarding the evidence of
multifractality of all the CEE stock markets. Similar to the results reported by Ferreira [32], the
Bulgarian market is seen as the market with the highest range of multifractality in the series.
Consistent with the finding of Plesoianu [30], the Romanian stock market presents multifractality.
However, in our study, the Romanian market is the one which partially does not reject the random
walk hypothesis (when computing the classical Hurst exponent (q = 2)). This result might explain the
recent FTSE Equity Country Classification from September 2019 [65] which suggests a possible
reclassification for Romania from frontier to secondary emerging (i.e., an improvement in efficiency).
Regarding the most developed stock markets in the region (the Polish, Czech, and Hungarian
markets), the results of our study contradict the results obtained by Caraiani [31], which indicate a
persistent behavior for these time series, the Hurst exponent being in their case lower than 0.5.

5. Conclusions
In this paper, we aim to determine the degree of efficiency of seven CEE stock markets, members
of the European Union, for which the previous empirical literature suggests mixed results. We use
MF-DFA to detect the existence of multifractality in the indices (serial dependence in stock indices).
The present study suggests that stock market returns are not a random process as the efficient market
hypothesis would predict, but rather a process influenced by both large and small fluctuations in
some periods. This translates into a lower degree of market efficiency for all of the considered CEE
stock markets. Using recent data, up to August 2018, for the daily values of the CEE blue-chip indexes,
the results of our analysis do not support weak-form efficiency for any of the CEE stock markets.
However, we have identified the largest degree of multifractality (i.e., the lowest market efficiency)
in the case of the Bulgarian and Czech markets, while the lowest level of dependence is achieved in
Sustainability 2020, 12, 535 12 of 15

the Slovenian and Croatian markets. Our results do not exclude, however, the theory that stock
markets can become more efficient as they develop [47]. In fact, one possible explanation for the
obtained results could be the underdevelopment of these stock markets, as noted also by Ferreira
[32]. The CEE stock exchanges are differently classified as follows [65]: developed (Poland), advanced
emerging (Czech Republic, Hungary), and frontier (Bulgaria, Croatia, Romania, Slovenia). For
instance, the four stock markets classified as frontier still failed “developed equity market” and
“liquidity” criteria, and therefore sustainable growth is highly important [6]. It is likely that in the
next economic cycles, with the increase of market capitalization, depth, and liquidity of the markets,
a weak form of market efficiency to be found in for all the considered CEE markets.
The results must be interpreted with caution given the well-known fact that the long memory
character of stock market index time series changes with the length of time period used [61]. We can
say that the results are in line with the previous findings [28–32] regarding the existence of
multifractality on the CEE stock markets. Similar to Ferreira [32], we find that the Bulgarian market
is seen as the market with the highest range of multifractality in the series.
Our results are of high importance both for policy makers, in their endeavor to ensure long-term,
sustainable growth of the financial markets, and for practitioners (portfolio managers and individual
investors) thriving to exploit market inefficiencies and implement suitable market strategies. The less
efficient markets will be of interest to those portfolio managers and individual investors looking to
obtain abnormal returns, while efficient markets will better reflect the interests of agents looking for
a better estimation of risk and return and of the optimal ratio between them. In accordance with the
opinion of Guidi et al. [2], we consider the efficient markets hypothesis to have a dual role: as a
theoretical and predictive model for the performed operations of the financial markets and as an
instrument to attract investors to developing markets, such as CEE stock markets.
Our work does have some methodological issues that could be improved in the future. For
example, the application of a dynamic Hurst exponent, with estimation using different window
lengths (a sliding windows approach) could offer important insight into the evolution of the CEE
stock markets in order to see which stock markets have become more or less efficient over time.
Further research could also identify the source of market inefficiency or the drivers of the strength of
multifractal spectrum, as well as the determinants of the development of the CEE stock markets and
of the possible policies that could drive further sustainable development. Factors such as the
traditional financing patterns for CEE companies, which are prone to internal funding and loan
finance, relatively young institutional investor involvement, given the only recent pension system
reform, the poor enforcement of the investor protection laws, as well as the existence of relative high
trading and information costs are just a few of the possible reasons of market inefficiency. By contrast,
factors such as increased financial disclosure, innovation, and enforcement of the investor protection
law could spur the stock market credibility and efficiency, leading to a more sustainable growth of
the CEE stock exchanges. Future research could also consider the direction taken by Bosch-Badia et
al. [66], who raises awareness of the way the stock markets are evolving and approaching ethics
recently, in terms of sustainability (environmental, social, and financial) and supporting the idea that
stock markets become efficient when prices become equal to the sustainable value.
While the CEE stock exchanges are still underdeveloped in comparison with their western
European counterparts in terms of market capitalization, trade volume, number of issuers, or
availability of the financial instruments, the size and depth of the stock exchanges in the CEE
economies have clearly experienced an upward trend, which emphasizes the potential role of the
CEE stock markets in ensuring sustainable economic growth, as documented by the finance-growth
nexus theories.

Supplementary Materials: The following are available online at www.mdpi.com/xxx/s1, Figure S3: STL
decomposition of stock returns time series (Polish stock market index, WIG-20), Figure S4: STL decomposition
of stock returns time series (Czech stock market index, PX), Figure S5: STL decomposition of stock returns time
series (Croatian stock market index, CROBEX), Figure S6: STL decomposition of stock returns time series
(Hungarian stock market index, BUX), Figure S7: STL decomposition of stock returns time series (Bulgarian stock
market index, SOFIX), Figure S8: STL decomposition of stock returns time series (Slovenian stock market index,
Sustainability 2020, 12, 535 13 of 15

SBI-TOP), Figure S9: The MF-DFA results of stock returns time series (Polish stock market index, WIG-20), Figure
S10: The MF-DFA results of stock returns time series (Czech stock market index, PX), Figure S11: The MF-DFA
results of stock returns time series (Croatian stock market index, CROBEX), Figure S12: The MF-DFA results of
stock returns time series (Hungarian stock market index, BUX), Figure S13: The MF-DFA results of stock returns
time series (Bulgarian stock market index, SOFIX), Figure S14: The MF-DFA results of stock returns time series
(Polish stock market index, WIG-20), Figure S15: The MF-DFA results of stock returns time series (Slovenian
stock market index, SBI-TOP).

Author Contributions: The paper is the result of cooperation between five authors. M.C.M. and L.R.M. identified
the concepts, completed the methodology and project administration, the formal analysis and investigation, and
the supervision and writing of the original draft. C.H. completed the data curation, collected the data for the
stock markets, used the software, validated the data, and completed data visualization. F.M.B and C.B.
completed the changes in the paper according to the reviews provided and edited the final paper. All authors
have read and agreed to the published version of the manuscript.

Funding: This research received no external funding.

Conflicts of Interest: The authors declare no conflict of interest.

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