Enhance Market Efficiency Research Articles

Self-fulfilling arbitrages necessitate crash risk

We propose a model in which hedge funds can initiate a sequence of arbitrage opportunities and a potential market crash without any exogenous shock. When hedge fund managers share a concern about a rare event, not necessarily affecting the fundamentals, some hedge funds may opt out for fear of redemption risk, leading to coordination failure. Our model demonstrates that the coordination failure generates an arbitrage opportunity but it comes with a chance of a market crash. It explains hedge funds’ low leverage before the recent financial crisis and discusses their conflicting features of causing a financial crisis and enhancing market efficiency.

Fondsvertrieb im Mantel neuer EU-Normen

On 20^th June 2019 two new EU rules on “facilitating cross-border fund distribution” were issued. Directive (EU) 2019/1160 amends the UCITS Directive and the AIFMD, while the gradually effective Regulation (EU) 2019/1156 contains, in parallel, details of marketing advertisements, fees and charges levied in connection with cross-border activities and new powers for ESMA. The objectives of the new frameworks are to facilitate the cross-border distribution of UCITS and AIF as certain barriers still hamper the ability of fund managers to fully benefit from the internal market respectively enhance market efficiency. According to the Commission‘s proposal dated as of 12^th March, only 37% of UCITS and about 3% of AIF are registered for sale in more than three Member States. Although the rules have promising designations, it is questionable whether the stated goal can be achieved. In this article, the author takes a critical position regarding the new rules.

Assessment of market competition and financial stability of Takaful market in Saudi Arabia and Malaysia

The purpose of this study is two-fold: to examine the Takaful market structure in Saudi Arabia and Malaysia, as well as to investigate market competition and financial stability nexus from year 2008 until 2016. This paper inspected the market structure by using Herfindahl-Hirschman index (HHI) and four-firm concentration ratio (CR4), while Z-score was employed to evaluate the aspect of financial stability. The ordinary least square (OLS) estimator was applied to assess the market competition and financial stability nexus. The outcomes revealed that the Takaful markets in both countries started shifting to moderately-concentrated position from highly-concentrated markets. Regression results appeared to support competition-stability view and transmission mechanism hypothesis. The study findings have significant policy implications for designing and implementing regulations to enhance market efficiency and to safeguard the interests amongst policyholders, apart from promoting both the progression and stability of Takaful market in both countries.

Shareholder-Creditor Conflicts and Limits to Arbitrage: Evidence from the Equity Lending Market

We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage through short-sale constraints. Using mergers of financial institutions as a shock to dual ownership, we show that dual holdings of debt and equity increases equity lending supply and reduces short-sale constraints. Shareholders are also less likely to restrict lending supply before shareholder votes when dual holders are present. Further, dual holdings are associated with faster corrections of mispricing, consistent with lower shareholder-creditor conflicts enhancing market efficiency. Our results suggest that shareholder-creditor conflicts give rise to limits to arbitrage and have a real effect on market efficiency.

Assessment of market competition and financial stability of Takaful market in Saudi Arabia and Malaysia

The purpose of this study is two-fold: to examine the Takaful market structure in Saudi Arabia and Malaysia, as well as to investigate market competition and financial stability nexus from year 2008 until 2016. This paper inspected the market structure by using Herfindahl-Hirschman index (HHI) and four-firm concentration ratio (CR4), while Z-score was employed to evaluate the aspect of financial stability. The ordinary least square (OLS) estimator was applied to assess the market competition and financial stability nexus. The outcomes revealed that the Takaful markets in both countries started shifting to moderately-concentrated position from highly-concentrated markets. Regression results appeared to support competition-stability view and transmission mechanism hypothesis. The study findings have significant policy implications for designing and implementing regulations to enhance market efficiency and to safeguard the interests amongst policyholders, apart from promoting both the progression and stability of Takaful market in both countries.

Heuristics Bias and Investment Performance: Does Age Matter? Evidence from Colombo Stock Exchange

This study investigates the existence of heuristics biases in Colombo Stock Exchange and their effect on investment performance from individual investor’s point of view. In specific, the effects of anchoring, availability bias, gamblers fallacy, overconfidence and representativeness are investigated. Further, the study inspects whether the heuristics biases differ between younger and older investors. The primary data were collected by survey from 425 individual investors. The data were analyzed using multivariate analysis such as Confirmatory Factor Analysis (CFA) and Structure Equation Modeling (SEM). The results show that there is a statistically significant effect of anchoring, availability bias, overconfidence and representativeness bias on investment performance. However, gamblers fallacy not significantly affects investment performance. Furthermore, statistically significant differences are found between the answers of younger and older investors. This study, hopefully, will help investors to be aware of the impact of their own heuristics bias on their decision making in the stock market, thus increasing the rationality of investment decisions for enhanced market efficiency.

A Legal Perspective on Technology and the Capital Markets: Social Media, Short Activism and the Algorithmic Revolution

In this essay, I examine the technological revolution in the capital markets through the normative lenses of law, policy and regulation. Do new media platforms necessarily enhance market efficiency? Or do they facilitate fraud and manipulation of stock prices? I focus on the rise of short activism on Twitter, Seeking Alpha and similar forms of social media: much like a stock promoter induces others to buy so he or she can sell at a profit, so a short activist might dupe others into selling so he or she can lock in profits before the stock rises again. Second, I examine the ways in which the rise of algorithmic trading shapes the emergence of accurate prices in the capital markets, from cybersecurity risk to limit order cancellations. There is growing evidence that prosecutors are taking technologically induced price distortions quite seriously. Finally, I consider emerging frontiers of technological innovation in the capital markets. The jury is still out on whether the benefits of digital ledger technology exceed the costs of the rampant investor deception which has led to a steady stream of crypto prosecutions and enforcement actions.

Airbnb, buy-to-let investment and tourism-driven displacement: A case study in Lisbon

Through detailed empirical analysis of a central area of Lisbon, this paper explores whether short-term rental platforms such as Airbnb channel investment in residential real estate and the way in which the local community is affected by the proliferation of apartments rented to visitors. Between 2015 and 2017 we conducted fine-grained fieldwork in the historical neighbourhood of Alfama and identified both the producers and socio-spatial consequences of short-term rentals. Our research did not find evidence of a sharing economy. Rather, it found a process of buy-to-let investment in which different players make profits from rents and displace residents with tourists. The paper develops two main arguments: first, we suggest that Airbnb acts as an instrument that contributes to the financialization of housing. Compared to the traditional rental market, short-term rentals offer a number of benefits that enhance market efficiency for property owners, making them increasingly attractive for both local and global investors. We found that the suppliers of short-term rentals are primarily investors who use housing as an asset to store capital. The main advantage of the short-term rental market for investors is that while they can make profits by renting properties to visitors, they can also sell them tenant-free at any moment. Second, Airbnb gives way to a hyper-flexible rental market that for tenants implies increasing insecurity and displacement concerns. We portray Airbnb as an example of buy-to-let gentrification that is experienced by residents as a process of social injustice.

How effective is central bank communication in emerging economies? An empirical analysis of the chinese money markets responses to the people\u2019s bank of China\u2019s policy communications

Central banks, in both developed and developing economies, are responding to the increased demand for transparency in monetary policy formulation and implementation. It is argued that central bank communication enhances market efficiency and calms down market volatility. This paper investigates to what extent that the People Bank of China’s (PBC) communication influences the Chinese money market. Three communication indexes were constructed and used in the empirical analysis. The findings indicate that the PBC’s communication has a significant effect on the country’s money market. Secondly, informal communication appears to be more effective than formal communication. Overall, the results suggest that policy makers and market observers could pay much more attention to the informal communications, such as speeches of the bank’s officials, than formal ones, such as the bank’s report and minutes.

Catastrophe bond spread and hurricane arrival frequency

Catastrophe bonds are the most successful alternative risk transfer tools in transferring catastrophic insurance risk to capital markets. This research provides empirical insights about the predictive power of catastrophe bond spreads in forecasting catastrophe arrival frequency as a test of the catastrophe bond market’s price discovery efficacy. Primary-market data for cat bonds, catastrophe arrival frequency data for hurricanes and windstorms, and climate variable data for Atlantic Multidecadal Oscillation, North Atlantic Oscillation and CO2 change rate are collected over June 1997 to March 2013 to examine this power. The calibration results show that cat bond spreads convey valuable incremental information as measured by the Akaike Information Criterion. Furthermore, in an out-sample test for hurricanes prediction, merging the conventional climate variables approach with our market-based forward-looking predictions reduces prediction errors by about 3% over the sample period. As the catastrophe bond market continues to grow with increasing trading volume, a needed ingredient to enhance market efficiency, we would expect this measure of improvement to accentuate.

The Pricing of Composition Uncertainty

The quant of 2007 and subsequent unfolding of the global financial crisis highlighted the importance of the crowded-trade problem (not being able to know how many others are taking the same position). To investigate the crowded trading, we present a model in which informed and uninformed traders face uncertainty about the composition of traders (composition uncertainty). We characterize the equilibrium in both the information and financial markets. Composition uncertainty distorts traders' information acquisition, demands, and perceived equity premium, resulting in a security price mispricing. The model helps to understand a linkage between liquidity and asset prices, proposes plausible explanations for large price swings, and demonstrates how current regulations to enhance market efficiency may not work in the presence of composition uncertainty.

TOMATO MARKET INTEGRATION: A CASE STUDY OF THE DURBAN AND JOHANNESBURG FRESH PRODUCE MARKETS IN SOUTH AFRICA

In a market-driven economy, price indicators guide and regulate production, consumption and marketing decisions over time, form and place. Identifying the causes of price differentials across markets is important for understanding markets. This study analyzes the market price integration of tomato in Durban and Johannesburg fresh produce markets in South Africa, using secondary monthly time series of wholesale price data for the period 2008–2012. Cointegration was tested using the Augmented Engle-Granger (AEG) test, while the direction of causality between Johannesburg and Durban prices was tested using the error correction model (ECM). The results showed that the two markets were integrated. Furthermore, the results also revealed that following a shock to the market that causes disequilibrium, economic agents take about a month to adjust back to equilibrium; the response to the shock is faster in the Durban market than in the Johannesburg market. The high degree of market integration suggests that the South African fresh produce market is quite competitive and provides little justification for government intervention designed to improve competitiveness or to enhance market efficiency. Policy implications for an improved and effective tomato marketing program were also discussed.

Моделирование купонной доходности на первичном рынке ипотечных ценных бумаг

Russian mortgage-backed securities (MBS) market is a factor of great social and economic significance as its development stimulates mortgage lending and nurtures demand for residential properties. The market development is determinated, inter alias, by growing issuance volumes that imply setting issuing parameters maximizing transactions volume. The article presents a methodology for setting up MBSs coupon rate during initial placement. At the first stage two coupon rate regressions are estimated: one is based on investor’s required rate of return and the other one - on originator’s coupon spread. Then, a forecast range coinciding priorities of both investor and originator is calculated. The range reflects optimal coupon rates that maximize transactions volume. The models are based on least squares method and employ data on 122 Russian MBS tranches issued between 2006 and 2016. The model showed high predictive power: actual rates matched forecasted ranges. The proposed approach increases the awareness of MBS market participants in making their investment decisions thereby enhances market efficiency and promotes its development.

Improving information gathering and distribution on sustainability features in the Australian residential property market

Highlights • Property practitioners impact on the information home buyers receive about sustainability features • Property practitioners differ in where they source this information • Property practitioners face challenges in collecting information about sustainability features • An information delivery framework involving property practitioners could help to deliver more comprehensive information • Regulations should foster uptake of sustainability by property practitioners by making more housing information available and accessible. Abstract Asymmetric information distribution from sellers to buyers in the residential property market disadvantages buyers, as buyers may not have complete information particularly related to sustainability features (that contribute to occupant health, safety and amenity, over time), which could potentially reduce operational costs associated with the property. Property practitioners including real estate agents, property valuers and mortgage brokers who have direct connection with buyers could possibly help to bridge this information gap. Through 28 semi-structured interviews, this study examines the perspectives of Australian property practitioners regarding the challenges they face in collecting information and strategies for distributing the information. The results show that the main concerns of property practitioners are the lack of data on the economic benefits of sustainability features and the lack of resources with which to gather such information. A framework that includes collaboration between government, supply chain agents, property practitioners, third-party real estate data collectors, researchers, and buyers, is proposed, for better information gathering and distribution. This could potentially reduce asymmetric information, particularly as related to sustainability features for potential buyers and hence enhance market efficiency.

Does Cross-Listing Really Enhance Market Efficiency for Stocks Listed in the Home Market? The Perspective of Noise Trading in the Chinese Stock Market

ABSTRACTThe investor recognition hypothesis and the bonding hypothesis, which help us understand the market quality of stocks that are cross-listed on different stock markets, imply improved market efficiency after cross-listing because of increased investor participation. However, the noise trading of inexperienced investors in the Chinese stock market negatively affects market efficiency. By employing propensity score matching and multivariate regression analysis, we show that the increased individual investor participation actually lowers market efficiency in their home market after cross-listing. This effect is more evident for stocks that were either listed first on the Chinese stock market or listed on the Chinese stock market and the Hong Kong stock exchange (SEHK) on the same date than for stocks that were listed first on the SEHK.

MEASURING AND MONITORING THE EFFICIENCY OF MARKETS

Market efficiency is measured by arbitrage proximity. The level of efficiency is calibrated by extent of a distortion of probability required to neutralize the drift. Simulations of bilateral gamma models estimated from past returns deliver for each asset on each day an empirical acceptability index. The assets covered include equities, commodities, currencies, volatility and hedge fund returns. It is observed that efficiency in equity is related to the process for up moves having more frequent and smaller jumps than its down side counterpart. For commodities the situation is reversed. Volatility indices trade more efficiently than equities, commodities, or currencies. Hedge fund returns reflect lower levels of efficiency supportive of hedge funds effectively exploiting market inefficiences. The relative inefficiency of the absence of trading is noted on comparing close to open with open to close returns. Small capitalization stocks trade more efficiently than the large ones. Sector exchange traded funds trade more efficiently than the S&P 500 index. Furthermore, economic activity reflected in greater high low spreads enhance market efficiency.

Frequency regulation capabilities in wind power plant

The design of frequency regulation services plays a vital role in automation and eventually reliable operation of power system at a satisfactory and stable level. Frequency response capability offered by wind plant is not same as the primary control capability of conventional plants, hence the integration of wind energy based generation at large scale has widespread impacts on power system stability and reliability. With the changing generation mix, modern electric power systems are facing a critical challenge in the real‐time balancing of demand and supply. This paper comprehensively reviews the various control functionalities available in wind energy systems for supporting frequency regulation at different levels of frequency control services starting from inertial control to the secondary control. An insight to new research challenges for better frequency control ancillary services in wind integrated system is also provided. Though wind-based ancillary services are still in research and development stage in most of the countries, future wind energy system participation is expected to contribute to enhanced market efficiency, improved system reliability and macro economic benefits to all stakeholders.

California low carbon fuel policies and natural gas fueling infrastructure: Synergies and challenges to expanding the use of RNG in transportation

The emergence of natural gas as an abundant, inexpensive fuel in the U.S. raises the possibility that expanding natural gas infrastructure could enable a transition to other low carbon fuels. We assess how California's existing fuels policies interact with expanding natural gas infrastructure in the state to promote renewable natural gas resource development in the state. We employ a profit-maximizing mixed-integer linear programming optimization to solve for development of natural gas refueling infrastructure incorporating spatial and temporal considerations and estimate the associated expansion in natural gas fuel demand in California. We investigate whether renewable fuel and carbon pollution credit markets create sufficient incentive to promote shifting to renewable natural gas fuel to replace vehicular natural gas demand. An assessment of California's current policies is undertaken and alternative policy options to enhance market efficiency are discussed. These policies include improvements to state regulations of waste disposal, incentives for fleets to shift to sustainable fuel trucks, and mechanisms to lower connection costs for in-state renewable natural gas into the California natural gas pipeline grid.

Market Makers under Extreme Market Conditions: Does Timing Matter?

This research tests the impact of the nomination of designated market makers in various market conditions. We explore the effect of such announcements on three dimensions: liquidity, volatility, and returns. The findings suggest that, despite the positive contribution that these announcements make to a stock’s liquidity and regardless of the market conditions or the preliquidity levels, they may increase the volatility that accompanies market trends in extreme market conditions. The results have important policy implications because they support the attitude of regulators who tend to postpone the introduction of new mechanisms for enhancing market efficiency during abnormal market conditions and wait for more conventional conditions. Furthermore, contrary to the general view, the results suggest that introducing market makers may not be a stabilizing mechanism. Therefore, regulators should examine alternative stabilizing mechanisms that account for extreme market conditions.

Measuring and Monitoring the Efficiency of Markets

Market efficiency is measured by arbitrage proximity. The magnitude of probability distortion necessary to remove drift calibrates the efficiency. Simulations of bilateral gamma models estimated on a year's past returns yield empirical acceptability indices for each day for each asset. The assets covered include, equities, commodities, currencies and volatility. It is observed that efficiency in equity is related to the up side gamma process having more frequent and smaller jumps than its down side counterparts. For commodities the situation is reversed. The relative inefficiency of the absence of trading is noted on comparing close to open return efficiencies those for open to close returns. Small capitalization stocks trade more efficiently than large capitalization stocks. Sector exchange traded funds trade more efficiently than the S&P 500 index. Furthermore, economic activity reflected in greater high lows spreads enhances market efficiency.