Abstract
ABSTRACT In 2014, the Colombian Stock Exchange commenced the implementation of its market-maker facility (MMF), aiming at improving market efficiency. This paper examines the impact of the MMF program on three volatility-related aspects: volatility persistence, risk premium, and information asymmetry. This paper provides new insights about the anticipated outcomes of Mercados Integrados Latinoamericanos (MILA) reforms, specifically the MMF on the volatility of the Colombian stock market. This topic has not been fully addressed in the existing literature. This study, therefore, provides useful information for regulators and policy makers, in endeavors to address key issues raised during the World Economic Forum (WEF) of 2016. This paper poses a challenge to policy makers and stock market regulators in Colombia to revisit the reform program and address the factors limiting the effectiveness of market reforms. This paper provides justification for replicating the study to cover other MILA countries due to existing differences in some domestic market policies and structures. The paper employs conditional variance models for measuring volatility persistence, risk premia, and information asymmetry. The models are employed on the COLCAP stock index (Colombia) observed from January 17, 2008 to May 30, 2019. Observations are divided into two samples - pre- and post-MMF. This paper provides evidence of the impacts of the MMF reforms in the Colombian stock market. Specifically, the MMF seems to have an impact on the following aspects: (i) the magnitude in which current returns depend on previous returns has increased; (ii) investment portfolio returns, which are generally low, have declined after the MMF, leading to less risk compensation; (iii) the MMF does not seem to have affected the volatility of market returns and information asymmetry; (iv) volatility persistence increased in magnitude.
Highlights
On March 6, 2014 the Colombian Stock Exchange joined the market-maker facility (MMF) and became the fourth stock market in Latin America to adopt this facility
The MMF dummy was introduced in mean equations in order to examine the impact of MMF on stock returns; the dummy carries a value of 0 pre 1 April, 2014 and 1 afterwards
This study shows that, overall, the MMF is associated with an increase in the magnitude in which last day’s returns can predict current returns, overall average returns seem to have declined after the MMF
Summary
On March 6, 2014 the Colombian Stock Exchange joined the market-maker facility (MMF) and became the fourth stock market in Latin America to adopt this facility. This facility followed a novel market reform vehicle known as Mercados Integrados Latinoamericanos (MILA) network (that is, the Integrated Latin American Market, in Spanish), which was established in 2011 by three countries (Colombia, Chile, and Peru) and joined by Mexico in 2014. MILA features a network of registered brokers in each of the four member countries, who are authorized to buy and sell stocks of any registered company listed on the integrated market in local currency. The MMF aimed at creating market efficiency by structuring and implementing a stockbroker’s commitment to trade (buying and selling) stocks
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