Leverage Effect and Switching of Market Efficiency Post Goods and Services Tax (GST) Imposition

Yok-Yong Lee,A M Bany-Ariffin,M H Yahya,S Aslam

doi:10.5539/ibr.v11n3p162

Yok-Yong Lee, A M Bany-Ariffin + Show 2 more

Open Access

https://doi.org/10.5539/ibr.v11n3p162

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Abstract

This paper investigates the leverage effect and switching of market efficiency after the GST imposition on fee-based financial services in Bursa Malaysia and Australian Securities Exchange (ASX). The sample in this paper comprises of public listed companies for the period of one year before and after the GST imposition. GJR-GARCH is employed to evaluate the asymmetry response that is associated with the negative news shocks. To assess the effect of transactional efficiency on the informational efficiency and the structural change of time-varying volatility, SGARCH is adopted. This research reveals the presence of leverage effect in developing and developed market. The GST imposition on fee-based financial services significantly reduces the informational efficiency in Bursa Malaysia, but not in ASX. To boost the tax revenues generated from the financial sector, the policymakers in the developed markets (similar to ASX) should contemplate imposing GST on the fee-based financial services without affecting the stability of the stock market. The investors in thin markets (such as Bursa Malaysia) could forecast the stock returns of the thin market upon GST imposition on fee-based financial services.

Highlights

Financial crises have occurred almost every decade
In light of data constraint in Johannesburg Stock Exchange (JSE), this paper provides an empirical examination regarding the effect of Goods and Services Tax (GST) imposition on the market efficiency in Bursa Malaysia and Australian Securities Exchange (ASX)
This paper explores the presence of asymmetry responses towards the negative news shocks and the changes of market efficiency after the GST imposition on fee-based financial services in Bursa Malaysia and ASX

Summary

Introduction

Financial crises have occurred almost every decade. The recent financial crisis in 2007-2008 is widely regarded as among the most severe since the Great Depression. There are three sufficient conditions (albeit, not necessarily) to achieve an “efficient” market: (1) a frictionless stock market that does not contain transaction costs, (2) costless information is available to the investors, (3) homogeneous investors’ expectations (Fama, 1970). Despite the unattainability of a frictionless stock market (with the absence of transaction costs), transaction costs in relation to the financial services should be kept at a reasonable level, to avoid the creation of an obstacle towards informational efficiency. The stock market frictions exist in the form of transaction costs, trading halts, circuit-breaker et cetera This is the first paper that seeks to shed some light on the long debate concerning the transactional efficiency as a necessary condition for the informational efficiency and allocational efficiency.

Literature Review

Data and Methodology

GJR-GARCH and SGARCH

Results and Discussions

Conclusions