A new perspective of equity market performance

The traditional data envelopment analysis (DEA) models assess equity market performance using the risk and return factor values associated only with the assessed equity market. However, in DEA models, the risk and return factors may be valued differently for different equity markets. A measure that incorporates the risk and return factor values of other equity markets to assess the performance of a given equity market is cross-efficiency. The cross-efficiency of an equity market provides a global perspective of its performance. In this paper, each year from 2003 to 2011, we estimate the cross-efficiency of 40 equity markets in a multi-dimensional risk-adjusted return framework. Applying the multiple-correlation clustering algorithm to the estimated cross-efficiency scores we classify the equity markets so that each cluster comprises of the markets that have been ranked similarly by the other equity markets. We highlight that cross-efficiency scores and membership in clusters is useful information to investors when constructing international portfolios.