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Following the landmark ruling by the German Federal Constitutional Court in Karlsruhe on 7th February 2014 in which they endorsed the efficient market hypothesis, we present evidence on the efficiency of the German financial market. Introducing a new variance bound test based on the Component-GARCH model of volatility to analyse the long- and short-runs effects on the efficiency of the German financial market, we test the price volatility of four markets: DAX stock index, German sovereign debt index as provided by Barclays and Bloomberg, Euro gold index by the World Gold Council and Euro currency index by the Bank of England. Our use of the Component-GARCH-T model highlight two key contributions, the first being the analysis of the efficiency of the market in the long and short runs. However, a more important contribution is the result of our variance bound test highlight the relatively strong acceptance of the efficient market hypothesis in both the short and long runs in all the observed financial markets. It must be stated our research is of importance to researches in both applied finance and portfolio management. The influencing question of what moves specific markets is crucial to market participants seeking market alpha for their investments strategies and portfolio optimisations.

Does the Federal Constitutional Court Ruling Mean the German Financial Market is Efficient?