Financial Market Efficiency Research Articles

Financial market regulation, country governance, and bank efficiency: Evidence from East Asian countries

This paper examines the relationship between financial market regulation, country governance and efficiency of commercial banks in East Asian economies during the period 2001-2008 using a two-stage estimation technique. In the first stage, we employ a non-parametric approach-Data Envelopment Analysis (DEA)-to estimate the banks' cost and profit efficiency scores and then Tobit estimation to analyze the impact of financial market regulations and country governance on bank efficiency. The results suggest that commercial banks in East Asia are relatively profit efficient rather than cost efficient. The findings show that countries with more financial freedom and independence are more cost efficient. Moreover, government effectiveness is found to be positively related to bank efficiency. Consistent with economic theory, corruption is negatively related to bank efficiency. Therefore, this study reveals the importance of financial market regulations and country governance as catalysts for efficient banking operations in East Asian economies

Further evidence on the rationality of interest rate expectations: A comprehensive study of developed and emerging economies

This study performs unbiasedness and efficiency tests of three-month and twelve-month ahead interest rate forecasts of one short-term and one long-term security of 10 developed and 20 emerging economies by exploiting a new survey data source. The results of the country-specific unbiasedness tests are mixed. However, the panel-based unbiasedness test results show that forecasts are biased. The efficiency test results indicate that forecasters do not incorporate all available information into their forecasts. We also find that emerging markets' interest rates are more predictable than the developed markets' interest rates at the shorter horizon due mainly to high inflation in the emerging markets. We also check for the robustness of our findings by dividing the sample period into two sub-periods, before and after the global financial crisis of 2007. We did not find any significant difference in the sub-period results compared to the full period. By considering a new group of countries (emerging economies), a new data source, and a new estimation approach, our study contributes to the financial market efficiency literature, especially on emerging markets. Investors and monetary policy makers should use these data cautiously as forecasts are not efficient. The study also has implications for monetary policy transparency and independence.

Financial Intermediaries and Market Efficiency

I study an economy in which leverage, in conjunction with limited liability, makes intermediaries eager to risk-shift, causing them to overbid for risky assets in states in which aggregate funding liquidity is not scarce. The ensuing asset price bubble can help to compensate for suppressed asset prices in liquidity-constrained states, stimulating asset origination ex ante, and, despite making prices more volatile, improving welfare. However, asset prices may also overshoot, leading to unhealthy ex ante bubbles and excessive production of risky assets. Capital requirements are no panacea: They can, in some cases, spur risk taking and make bubbles bubblier.

Is a larger equity market more information efficient? Evidence from intervalling effect

This paper investigates the impact of equity return autocorrelation on financial market efficiency via intervalling effect. A simple model is proposed to show that the degree of intervalling effect is related to the security return autocorrelation. A more general version of Levy and Levhari hypothesis is proposed to find that the degree of the autocorrelations of the security and the market returns determines the existence and the direction of the intervalling effect and the size of the intervalling effect are dependent on the degree of the security autocorrelations. Empirical evidence of the latter is presented.

Dividend Policy and the Profitability of Selected Quoted Manufacturing Firms in Nigeria: An Empirical Analysis

This paper examined the impact of dividend policy on the profitability of selected quoted manufacturing firms in Nigeria from 1981 – 2014. The objective was to investigate the existing relationship between dividend policy and profitability of the selected quoted manufacturing firms in Nigeria. Time series data were computed from financial statement of the selected quoted manufacturing firms and stock exchange factbook. Return on Investment (ROI) and Net Profit Margin (NPM) were modeled as our dependent variables while Dividend Payout Ratio (DPR), Retention Ratio (RR), Dividend Yield (DY) and Earnings per Share (EPS) were proxied as our independent variables. Multiple regressions with the aid of Statistical Package for Social Sciences Research (SPSS) were used as data analyses techniques. Multi co-linearity, co-linearity, Durbin Watson, F-statistics and regression coefficient were used to determine the dynamic relationship between the variables. Findings revealed that all the independent variables have positive relationship with the dependent variables except dividend yield. The study recommends that operational efficiency of Nigerian financial market should be deepened and management should strengthen its effort for effective dividend policy that will increase the profitability of the quoted manufacturing firms Nigeria.

THE IMPACT OF FINANCIAL MARKET ON INDUSTRY GROWTH: AN EVIDENCE FROM RUSSIA AND IRAN

The relationship between financial markets and industry growth has been approved by many previous studies. In this paper, as an innovative research, we try to find the impact of market capitalization in financial market as a proxy for financial market on the industry growth in Russia and Iran. In fact, these two countries are classified as developing economies in which the financial markets can play a powerful engine to improve the industries’ performances. Hence, it would be interesting to compare market capitalization-industry growth nexus in Russia and Iran as two developing countries. In order to fulfill this purpose, an econometric model called Vector Autoregressive Model (VAR) is applied for the annual data over the period of 1992-2014. The finding proves the positive relationship between market capitalization and industry growth in both countries, Iran and Russia. Based on the results, a 1% increase in market capitalization in Iran and Russia increases the industry growth by 0.07% and 0.02%, respectively. It has been concluded that market capitalization can play a significant role in order to grow the industry in Iran and Russia. However, these two countries need to improve the efficiency of their financial markets to improve the positive impact of these markets on their industrial growth. The novelty of this research can be highlighted in this way that the financial market in oil exporting countries, Russia and Iran as our case studies, may be a golden key to reach to a positive and stable economic growth. Thereby, oil exporting countries should try to implement good financial policies and improve the efficiency of financial market.

Case Study: Porsche versus Volkswagen

This case study describes Porsche’s attempt to acquire Volkswagen. It covers the timeline of events and major press releases, the history of the two companies, their operating and financial performances and ownership structures. The case also illustrates the role of the state as a shareholder, the importance of financial regulation, arbitrage, hedge funds, short-selling and market efficiency. The case is designed to stimulate students and create a desire to dig deeper. A teaching note provides a more detailed and comprehensive picture including possibilities for role play. The teaching note can be obtained from the author.

Financial System Development and Economic Growth in Transition Economies: New Empirical Evidence from the CEE and CIS Countries

ABSTRACTWe examine the role of financial development in economic growth in the former Communist countries of Central and Eastern Europe and the Commonwealth of Independent States during the first two decades since the beginning of transition. These countries, which had undeveloped financial systems under Communism, provide an interesting test of the relationship between financial development and growth. Our study is the broadest in terms of coverage and time period. We find that measures of financial market efficiency and competitiveness are more important than the size of the market in terms of promoting economic growth.

Evolving efficiency of spot and futures energy markets: A rolling sample approach

In this paper, we examine the weak-form efficient market hypothesis of energy markets by testing the random walk behavior of spot and futures prices. We contribute to the financial market efficiency literature by investigating the time varying markets efficiency using a “rolling sample” approach instead of an analysis of different time periods. For this end, we use the wild bootstrap Variance Ratio (VR) tests and the Detrended Fluctuation Analysis (DFA) technique. Empirical results show strong evidence of time varying markets efficiency with rapid mean reversion towards markets efficiency. The evolving efficiency of spot and futures markets depends on the prevailing economic and political conditions. Among the energy markets examined in this study, the spot and futures crude oil and the RBOB regular gasoline markets show the highest degree of market efficiency, while spot and future propane market is at the end of the ranking.

Financial Market Efficiency Should be Gauged in Relative Rather than Absolute Terms

Economists assess the efficiency of financial markets in absolute, all-or-nothing terms. However, this is at odds with a no-nonsense physics approach. Here, I describe how the relative efficiency of markets can be gauged taking advantage of algorithmic complexity theory. This is not physics-envy because the approach is superior in considering the proper randomness present in complex financial markets.

Climate Change and Financial Market Efficiency

This dissertation abstract and reflection commentary present the work of Dr. Andrea Liesen. The dissertation examines the informational efficiency of financial markets to price the systematic risk stemming from climate change for European companies. The abstract provides an overview of the underlying theory, introduces the development of hypotheses, the method applied, and data gathered, as well as selected implications of results. The reflection commentary discusses the author’s views of the research process as a junior scholar.

Testing financial market efficiency

Since the birth of the financial literature until the 1970s, the efficient market hypothesis has been regarded as a central hypothesis. In the mid-1970s, there were theoretical and empirical evidence stating that the EMH seems untouchable. However, recently there has been an emergence of arguments doubting the EMH. The EMH implicitly indicates that stock prices can follow a random walk. Currently, financial theory has shown that stock prices do not follow a random walk. In this regard, our empirical study rejected the hypothesis of a random walk for 27 indices out of 28 studied. We confirm that the studied indices time series do not follow a random walk, and therefore we reject the financial markets efficiency hypothesis in its weak form. This result corroborates those of Fama and French (1992.993), DeBondt and Thaler (1985), Lo and MacKinlay (1991), Jagadeesh and Titman (1993) and Shleifer and Vishny (1997). Therefore, financial markets efficiency hypothesis in its weak form is also rejected. This result is logical given the limited capacity of the classical theory in explaining abnormal returns such as bubbles, crashes and excess volatility.

Firm Disclosure, Financial Markets and the Macroeconomy

How does the financial sector affect the aggregate economy? This paper proposes a novel informational amplification and spillover channel. Our model demonstrates mutual learning between firms and financial markets: a firm's information disclosure can attract more information from the financial market, which can guide the manager to make a better investment decision. In a Lucas islands economy setting, we show that information production complementarities exist between the financial sector and the real sector within an island and between islands. When the financial sector in some islands suffers a negative shock, it becomes less able to conduct price discovery. This leads to the real sector in these islands having less incentives to produce information. Noisier information signals result in less-efficient real investment decisions in these islands and hence lower aggregate output. Facing the decline in aggregate demand, other islands are affected, with less information acquisitions and lower output. The negative impact on this part of the economy feeds back to the original part of the economy. In general equilibrium, aggregate real output (i.e., the level of economic activity) and financial market efficiency (i.e., the level of information) feed back and reinforce each other, leading to excess volatility on both sides. The welfare implications of the model are analyzed.

Testing financial market efficiency

Since the birth of the financial literature until the 1970s, the efficient market hypothesis has been regarded as a central hypothesis. In the mid-1970s, there were theoretical and empirical evidence stating that the EMH seems untouchable. However, recently there has been an emergence of arguments doubting the EMH. The EMH implicitly indicates that stock prices can follow a random walk. Currently, financial theory has shown that stock prices do not follow a random walk.In this regard, our empirical study rejected the hypothesis of a random walk for 27 indices out of 28 studied. We confirm that the studied indices time series do not follow a random walk, and therefore we reject the financial markets efficiency hypothesis in its weak form. This result corroborates those of Fama and French (1992.993), DeBondt and Thaler (1985), Lo and MacKinlay (1991), Jagadeesh and Titman (1993) and Shleifer and Vishny (1997). Therefore, financial markets efficiency hypothesis in its weak form is also rejected. This result is logical given the limited capacity of the classical theory in explaining abnormal returns such as bubbles, crashes and excess volatility

Investor Protection and Value Impact of Stock Liquidity

Despite recent theories on the link between financial market efficiency and real economic efficiency, not much evidence exists in international finance that addresses how investor protection strengthens the connection between the two efficiencies. Our study examines this important issue on a broad sample of firms from 41 countries for the period 1996-2010. We demonstrate that better investor protection is associated with greater value impact of stock liquidity. The observed relationship is mainly driven by the effect of investor protection on the growth of future cash flows rather than the reduction in the cost of capital. We use the enforcement of Market Abuse Directive (MAD) among European member countries as an exogenous shock to country-level investor protection and find that value impact of stock liquidity tends to be stronger after the MAD enforcement. Further analysis explores the many explanations for the role of investor protection. We find evidence consistent with strong investor protection inducing low levels of managerial entrenchment, high levels of informed trading and strong linkage of executive pay with performance. Finally, our analysis suggests that financial market integration attenuates the importance of country-specific investor protection to the firm value sensitivity to liquidity.

دور الفقاعات المضاربية في تكرار الأزمات المالية : دراسة قياسية لأزمة الرهن العقاري

تكرار الأزمات المالية | سوق الرهن العقاري | الفقاعات المضاربية | التكامل المشترك | كفاءة السوق المالي | The Repetition of Financial Crises | Housing Bubble | Speculative Bubbles | Joint Integration | Financial Market Efficiency

Do emerging markets become more efficient as they develop? Long memory persistence in equity indices

It seems reasonable to expect financial market efficiency to be related to the economic development level. We study a 16year sample, covering 22 countries. The Hurst–Mandelbrot–Wallis rescaled range is our efficiency measure, which we apply to returns and volatility. We find strong evidence of long memory persistence in volatility over time, which is unsurprising. However, unlike previous researchers, we could not find evidence of rescaled ranges trending down over time. However, we introduce an alternative measure of economic development, namely, whether FTSE (2011) classify an emerging market as ‘advanced’ or ‘secondary’. This measure shows greater efficiency in returns and volatility for ‘advanced’ emerging markets.

Why Defer to Managers? A Strong-Form Efficiency Model

We compare the efficiency with which management discretion and shareholder choice regulate hostile tender offers. This is the first paper in a long running debate that rigorously compares these legal rules to analyze both the critical informational assumptions and the interplay of those assumptions with principles of financial market efficiency. A critical innovation of our model is its focus on an informed management's choice among alternative corporate policies under the protection of the business judgment rule, but where agency costs exist. We assume that corporate assets and reinvestment opportunities are efficiently priced by financial markets, but that markets never learn the value of foregone investments. In this case, shareholder choice may create an agency problem whereby managers forego positive net present value investments that increase the risk of a hostile bid. We are able to determine analytic conditions under which the expected cost of this agency problem exceeds that of the standard agency problem usually identified with management discretion.

Civil Liability of Credit Rating Agencies – Regulatory All-or-Nothing Approaches between Immunity and Over-Deterrence

Civil liability of rating agencies has to strike a balance between over-deterrence and overly lax behavior control. The resulting problems of a capital market freeze and difficulties of proof, as they become apparent in most legal systems and the European Commission’s Draft Proposal to amend the EU-Rating Regulation, could possibly be eliminated by procedural presumptions or liability caps. The paper was prepared for the Seminar on the regulation of Credit Rating Agencies in Oslo 10 December 2012, organized by The International Financial Market Regulation, Institutions and Efficiency Projects at the Department of Private Law and supported by the Finance Market Fund. The paper is accepted for publication in European Business Law Review, and will be published in a special issue edited by Mads Andenas and Gudula Deipenbrock.

Study on Financial Management Innovation and Currency Policy

The thesis analyzes the role of transform risks caused by innovation tools, the extent to which financial innovation tools have an influence on risks of financial system, the extent to which financial innovation has an influence on financial statement and macro monetary policy, the extent to which financial innovation exerts influences on classification of monetary, government’s requirement for monetary, the degree to which financial innovation exerts an influence on control of money supply. This thesis studies the alternative and significance of monetary aggregates, a new perspective of financial innovation and general money supply. Financial innovation can enhance the efficiency of the whole financial market and proactively promote economic development. Financial innovation is charactered by anteriority and financing, also can erase inflation.