On the efficiency of the leveraged loan market

Abstract

This paper evaluates the informational efficiency of the leverage loan market. First, variance ratio tests are conducted to answer the question whether this private debt market as a whole is efficient. Second, the recently developed adjusted market inefficiency magnitude is applied to assess the level of market inefficiency over time. The results indicate that the broad leveraged loan market, as well as capitalization and risk-based sub-indices exhibit large levels of inefficiency and that loan returns do not follow a random walk but are significantly serially correlated. The degree of inefficiency shows some time-variation, however, it is generally large in magnitude.