An analysis of stock market efficiency: Developed vs Islamic stock markets using MF-DFA

•Stock market data are multifractal in nature.•Developed markets tend to show relatively higher efficiency ranking in short term but moderate in long term.•Islamic markets tend to have moderate to low efficiency ranking over the last decade.•Among the Islamic markets, Malaysia, Indonesia and Turkey are relatively ranked better than others.•Efficiency of a market is highly dependent on the stage of stock market development.

An efficient market has been theoretically proven to be a key component for effective and efficient resource allocation in an economy. This paper incorporates econophysics with Efficient Market Hypothesis to undertake a comparative analysis of Islamic and developed countries’ markets by extending the understanding of their multifractal nature. By applying the Multifractal Detrended Fluctuation Analysis (MFDFA) we calculated the generalized Hurst exponents, multifractal scaling exponents and generalized multifractal dimensions for 22 broad market indices. The findings provide a deeper understanding of the markets in Islamic countries, where they have traces of highly efficient performance particularly in crisis periods. A key finding is the empirical evidence of the impact of the ‘stage of market development’ on the efficiency of the market. If Islamic countries aim to improve the efficiency of resource allocation, an important area to address is to focus, among others, on enhancing the stage of market development.