Impacts of investor's sentiment, uncertainty indexes, and macroeconomic factors on the dynamic efficiency of G7 stock markets

This paper examines the impact of macroeconomic factors, microstructure factors, uncertainty indexes, the investor sentiment, and global shock factors on the dynamic efficiency of G7 stock markets. We use a non-Bayesian Generalized least squares-based time-varying model by Ito et al. (Appl Econ 46(23):2744–2754, 2014; Appl Econ 48(7):621–635, 2016) and the time-varying adjusted market efficiency method. The results show using the augmented mean group estimator and heterogeneous panel causality method a strong relationship between stock market efficiency and oil prices. In addition, all stock markets became more inefficient during COVID-19 crisis and upward trend in oil prices. Furthermore, by means of the heterogeneous panel causality test, we find evidence of unidirectional from all the considered factors, except for the consumer confidence index variable, to stock market efficiency. Moreover, we show a significant bidirectional causality between the time-varying market efficiency and both interest rates, exchange rates, market volatility, economic policy uncertainty, and the composite leading indicator. The implications of our findings for investors and policymakers are discussed.