Improve Market Efficiency Research Articles

Equilibrium models of coordinated electricity and natural gas markets with different coupling information exchanging channels

In electricity market (EM) and natural gas market (GM), increasingly interacted energy flows and economic flows call for an appropriate market coordination mechanism to improve the overall market efficiency. In this paper, two equilibrium models of coordinated electricity and natural gas markets are proposed with difference in the coupling information exchanging channels between EM and GM. After fully considering the participants, especially the supply-side integrated strategic firm (ISF) and the demand-side regional integrated energy system (RIES), this paper numerically analyzes the social welfare, market power, participants’ profits/costs and market price in two equilibrium models. In addition, the overall social welfare of coordinated markets is compared with traditional uncoordinated markets to illustrate the improvement in market efficiency. The bi-level market equilibrium models are converted into a linearized equilibrium problem with equilibrium constraints (EPEC) which is a mixed-integer linear program (MILP) and can be efficiently calculated by commercial solvers.

The impact of MILA market-maker facility on volatility of the Colombian stock market

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.

An Empirical Research of Impact of the Merger of Pan-European and Oslo Stock Exchanges on the Efficiency of Tobacco Securities Market

Objectives: Europe is one of the important markets for traditional tobacco. We analyzed the impact of exchange consolidation on securities market efficiency, so as to enable tobacco enterprises to improve the financing efficiency of the stock market and carry out transformation and upgrading. Methods: In this work. We’re based on efficient market theory, the merger of Pan-European Stock Exchange and Oslo Stock Exchange, Norway in June 2019 is analyzed through empirical analysis. The logarithmic returns of 25 listed companies in the Oslo Stock Exchange OBX-25 index were analyzed using OLSN Chow and KPSS tests. Results: It is found that of 72% of securities, the explanatory power of market returns for securities returns is increased, which shows significant improvement in market efficiency. The merger of stock exchanges can indeed improve the market efficiency. In addition, through the KPSS test, it is found that the merger of stock exchanges can improve the market efficiency. As time goes by, however, the validity decreases. Conclusion: The improvement of the efficiency of the securities market will be conducive to the financing efficiency of listed tobacco companies in the secondary market, promote the transformation of enterprises, and contribute to the tobacco control and the health of the population in Europe.

Effects of herding behavior of tradable green certificate market players on market efficiency: insights from heterogeneous agent model

Tradable green certificate (TGC) scheme promotes the development of renewable energy industry which currently has a dual effect on economy and environment. TGC market efficiency is reflected in stimulating renewable energy investment, but may be reduced by the herding behavior of market players. This paper proposes and simulates an artificial TGC market model which contains heterogeneous agents, communication structure, and regulatory rules to explore the characteristics of herding behavior and its effects on market efficiency. The results show that the evolution of herding behavior reduces information asymmetry and improves market efficiency, especially when the borrowing is allowed. In addition, the fundamental strategy is diffused by herding evolution, but TGC market efficiency may be remarkably reduced by herding with borrowing mechanism. Moreover, the herding behavior may evolve to an equilibrium where the revenue of market players is comparable, thus the fairness in TGC market is improved.

An exploratory study of heuristics for anticipating prices

PurposeThis research explores how investment and central bankers cope with strategic uncertainty when they anticipate prices. The uncertainty originates from others' decisions and their consequences, and cannot be meaningfully reduced to risk. The authors postulate that, in order to cope with this type of uncertainty, bankers use simple rules, also called heuristics. This study aims to identify such heuristics and the psychological processes that underlie them.Design/methodology/approachThe authors interviewed 22 managers of teams tasked to anticipate prices, in two leading investment and central banks. The primary data came from in-depth, semi-structured interviews lasting 30–60 min, supplemented by our observations during the on-site visits, emails and phone calls when preparing the interviews, and reports published by the banks. Data were coded and heuristics were induced over multiple rounds by multiple researchers.FindingsBankers (1) construct simple game representations of markets, (2) make inferences to gauge opponents, (3) become alert when they see too much agreement and (4) communicate coherent narratives. Heuristics (1)–(3) are employed when the pace of decision-making is fast, whereas (4) is used for longer time scales. In sum, bankers exhibit reciprocal bounded rationality, wherein interaction partners are mutually aware of and adapted to the fundamental uncertainty of the task and their limited resources.Originality/valueHeuristics for anticipating prices have not been studied empirically outside the lab. The findings may help integrate conceptualizations of heuristics in the simple-rules and fast-and-frugal-heuristics research programs and improve market efficiency.

Machine Learning and Speed in High-Frequency Trading

The creative destruction wrought by high-frequency algorithmic tradinghas raised increasing concerns about the eect of machine learning behaviorsand ultra high-frequency trading in finnancial markets. By employing a geneticalgorithm with a classifer system as an adaptive learning tool, we address someof these concerns by studying a dynamic limit order market model with asymmetricinformation and varying speeds of high-frequency trading (HFT). We showthat HFT benefits uninformed traders, improves information effciency but reducesmarket liquidity. We find that there is a trade-off where a competition effect erodesthe information and speed advantages of high-frequency traders, increasing tradingspeeds of HF traders, reduces market liquidity but generates a hump-shaped relationshipto the protability of high-frequency traders and information eciency.This research finds there may be potential benefits to throttling the trading speedarms race to improve market efficiency. We also find that strategic algorithmictrading compensates for diminishments in speed advantages, providing an insighton machine behavior in the FinTech age.

Novel information fusion model for simulating the effect of global public events on the Sino-US soybean futures market

Trade frictions and global public health security events have made it more difficult for investors to generate positive returns from the Sino-US soybean futures markets. This paper employed deep learning and mode decomposition to improve market efficiency and reduce investor risk from Sino-US trade frictions and the COVID-19 pandemic using soybean futures data published on the Dalian Commodity Futures Exchange (DCE) and the Chicago Board of Trade (CBOT). The proposed model was found to assist investors to proactively perceive the market risks from disruptive events and make profitable decisions. The results provide practical guidance for the conduct of quantitative trading on the soybean markets between the two countries.

Asymmetric information and blockchains in soybean commodity markets

AbstractAsymmetric information is prevalent in the grain and oilseed markets. This paper demonstrates the benefits of blockchain technology to mitigate asymmetric information about the soybean's protein quality between sellers and buyers. We use decision trees to model information asymmetry under both conventional and blockchain scenarios. The results suggest that asymmetric information can be mitigated with a blockchain, resulting in substantial premiums (40–60 cents per bushel of soybeans). These results could have significant implications for the grain and oilseed industry in order to decrease transaction costs, to improve market efficiency, and to prioritize strategies for the procurement of soybeans.JEL CLASSIFICATIONO33 Q13; Q17

Call auction, continuous trading and closing price formation

The Shanghai Stock Exchange changed its trading mechanism of the preceding three minutes to closing from continuous trading to call auction on August 20, 2018, while Shenzhen had already changed this in 2006. Taking all A-shared stocks’ data from 2017 to 2019 as our sample, we construct difference-in-difference models and find significant trading volume shifts from closing call to preceding continuous trading. We also see a significant increase in volatility in call preceding continuous trading, but a significant decrease in closing price deviation in a closing call. Market efficiency is found to be improved by these changes, perhaps due to less liquidity noise in the closing price. Our conclusions remain robust in various robustness checks. It suggests that the introduction of closing call auction would reduce manipulation and liquidity noise in the closing price, thus improving market efficiency in China.

Supervision mechanism of virtual bidding in electricity market: a review

In the reform of China‘s electricity market, most provinces adopt the centralized mode based on nodal pricing, thus the price convergence problem between day-ahead market and real-time market needs to be promoted. As a common practice in America, virtual bidding mechanism can promote price convergence, control market power and improve market efficiency. However, due to the financial nature of virtual bidding, virtual bidders may disrupt the market and obtain improper profits, thus damaging market efficiency and the interests of other participants. This paper summarizes the key characteristics of virtual bidding mechanisms in America, and analyzes the potential problems that by introducing virtual bidding into China. Then this paper summarizes the pre and post regulatory measures as well as credit mechanisms of virtual bidding in different electricity markets. In view of the cross-product manipulation through virtual bidding, this paper analyzes its principle and summarizes the regulation methods. Finally, considering the specific situation of China’s electricity market reform, this paper puts forward regulatory suggestions on implementing the virtual bidding mechanism in China.

Private pension fund flow, performance and cost relationship under frequent regulatory change

PurposeThis paper aims to investigate private pension fund investor sentiment against fund performance and cost in an environment of frequent regulatory changes. The analyses are conducted in a low return, high-cost private pension fund market environment, which makes it easier to observe the relationship between investor sentiment to return and cost.Design/methodology/approachThis paper conducts fixed effect, random effect and random effect within between effect panel data analyses of all Turkish private pension funds from 2011 to 2019. This paper conducts the analyses using aggregate data and subsets based on fund characteristics and pre-post regulation periods.FindingsWhen regulations provide compensation and improve market efficiency in a pension fund market, investor focus shifted from performance to cost. Investors allocated assets with respect to return realization when adequately compensated for risk or had favorable cost contract clauses. Consequently, investors in pension funds with lower expected returns and no special fee reduction clauses tended to adopt the strategy of cost minimization.Research limitations/implicationsThe overlap of regulatory change periods could complicate the ability to distinguish the impact of any one specific change. The findings therefore cannot be generalized to differently structured markets.Practical implicationsRegulatory changes could lead to a switch of investor objectives. When regulatory changes compensate investors and increase market efficiency, investors objective could switch from performance to cost.Originality/valueThis study investigates investor sentiment in a relatively young private pension fund market, in which the relevant regulatory body ambitiously implements frequent changes in regulation. The selected market is unique in the sense that it has negative real returns and high costs, which make investor focus to return and cost more readily apparent.

European Goods Market Integration in the Very Long Run: From the Black Death to the First World War

This paper examines price convergence and changes in the efficiency of wheat markets, covering the period from the mid-fourteenth to the early twentieth century and most of Europe. The analysis is based on a new data set of prices from almost 600 markets. Unlike previous research, we find that convergence was a predominantly pre-modern phenomenon. It started in the late fifteenth century, advanced rapidly until the beginning of the seventeenth century when it temporarily stalled, resumed after the Thirty Years’ War, and accelerated after the Napoleonic Wars in response to trade liberalization. From the late 1840s, convergence petered out and turned into divergence after 1875 as policy decisions dominated technological change. Our results point to the ‘Little Divergence’ between North-Western Europe and the rest of the continent as starting about 1600. Long-term improvements in market efficiency began in the early sixteenth century, with advances over time being as uneven as in price convergence. We trace this to differential institutional change and the non-synchronous spread of modern media and systems of information transmission that affected the ability of merchants to react to news.

Market Efficiency and Nonlinear Analysis of Soybean Futures

In this paper, the multifractal detrended fluctuation analysis (MF-DFA) method is used to identify the multifractal structure of in the Chicago Board of Trade (CBOT) soybean futures and quantitatively describe the inefficiency and nonlinearity of the market. The data is the daily price of CBOT soybean futures from 3 January 2000 to 20 December 2019, with a total of 5025 trading days. The empirical results also show that the perspective based on MF-DFA can explain the market’s nonlinear, long-range correlation, predictability and other financial anomalies. At the same time, the prediction of price change direction and risk degree of the market are further studied. It is pointed out that multifractal characteristics are generated under the joint action of fat-tail distribution and long-range correlation. Investors can make use of these market characteristics to make arbitrage possible. Finally, based on the empirical results, some policy suggestions are put forward: strengthening rational investment education, strengthening supervision, reducing information asymmetry and other measures to improve market efficiency.

Open Access, Interoperability, and the DTCC's Unexpected Path to Monopoly

In markets with significant scale economies and network effects, scholars and policymakers often tout open access and interoperability requirements as superior to both regulated monopoly and the break-up of dominant firms. In theory, by compelling firms to coordinate to develop common infrastructure, regulators can use these requirements to replicate scale and network economies without leaving markets vulnerable to monopoly power. Examples of successful coordination include the provision of electricity, intermodal transportation, and credit card networks. This Article analyzes the history of U.S. securities clearinghouses and depositories in order to offer a significant qualification to this received wisdom. This history demonstrates that open access and interoperability requirements can actually serve as instruments by which dominant firms obtain and entrench their monopoly power. Specifically, by imposing high fixed costs to connect to common infrastructure, allowing dominant firms to dictate the direction and pace of innovation and investment, and reducing the scope for product differentiation, these requirements can prevent smaller firms from competing with their larger rivals. In these ways, open access and interoperability can actually exacerbate the very problems that they were designed to address. Our analysis helps explain why important components of our financial infrastructure have become too-big-to-fail. It also helps explain why, despite their highly concentrated structure, U.S. securities clearing and depository markets have still been characterized by relatively high levels of innovation and investment. More broadly, our analysis suggests that coordination requirements will only constrain market power where the costs of building, maintaining, and connecting to common infrastructure are allocated in a way that does not discriminate against smaller firms, and where larger firms are not able to dictate decisions about innovation and investment. Where this is not possible, interoperability and open access are unlikely to forestall monopoly control, even though they may still improve market efficiency by exposing incumbents to the threat of new entry.

On the Efficiency of Meme Stocks

Meme stocks have received a lot of attention in the media from both investors and regulators in recent months, particularly following the GameStop episode. The power of the crowd, coupled with unprecedented coordination, raises obvious questions about the impact of these social media traders on market efficiency. We construct two meme stock indices based on stocks whose purchase the Robinhood app restricted during the GameStop episode. We provide evidence of meme stocks’ market efficiency, and particularly during the COVID-19 crisis. Our result indicates, perhaps contrary to some early speculation, that this new influx of highly connected retail investors improves efficiency.

An Analysis of the Rationale & Risks for the Australian Your Future Your Super Performance Test

The Your Future Your Super reforms introduced in June 2021 include an investment performance test (YFYSPT) for MySuper products initially, but the Australian Prudential Regulatory Authority (APRA) intends to extend the YFYSPT to other superannuation products from 2022. This paper assesses the YFYSPT from the perspectives of achieving market efficiency, providing information that members of superannuation products can use to make informed decisions, and better aligning the member-agent interest. The paper also analyses the sources of risk that might cause MySuper products to fail the YFYSPT. The paper concludes that the YFYSPT is likely to improve market efficiency and reduce the misalignment of members’ and investment managers’ interests but fails to provide a meaningful basis for members to make informed decisions. There are also technical issues in the formulation of the YFYSPT. The major risk of failing the YFYSPT arises from the use of active investment management that does not produce returns net of investment and administration fees and taxes in excess of the YFYSPT indices.

Short Sell Constraints and the Price Premium of Chinese Stock A-shares Over Hong Kong H-shares

I examine the impact of short sale constraints on the price premium of Chinese A-shares over Hong Kong H-shares (AH share premium) using a firm-fixed effect panel regression method. It shows that after controlling for variables related to other documented hypotheses, relaxation of short sale constraints in A-shares explains the narrowing AH share premium. Both the launch of CSI Index Future and the introduction of short sale pilot program in 2010 on mainland China stock markets mitigate short sale constraints, improve market efficiency, and therefore help reduce AH share premium.

An agent-based modeling approach for analyzing the influence of market participants’ strategic behavior on green certificate trading

China has announced that the mandatory green certificate trading would be implemented in 2021. The mandatory green certificate trading not only fosters the liquidity of the green certificate market but also induces the possibility of market participants taking strategic behavior to gain more market returns. Generally, the self-interested strategic behavior was not conducive to improving market efficiency, thereby impeding the implementation of mandatory green certificate trading. To evaluate the influence of market participants’ strategic behavior on the green certificate trading, we embed the strategic behavior model into the artificial green certificate market to simulate the market participants’ strategic behavior in green certificate trading. The results indicate: (1) in green certificate market, the strength of the herd effect determines the average compliance costs level; (2) the value-trading strategy is the optimal strategy for renewable obligation subjects to reduce the compliance costs of mandatory green certificate trading; (3) market participants’ strategic behavior mainly affect the stability of green certificate price, and the greater the price fluctuation, the slower convergence speed to the equilibrium price.

Do crude oil price bubbles occur?

The Generalized Supremum Augmented Dickey-Fuller (GSADF) test is employed to conclude whether crude oil price (OP) experiences multiple bubbles. The technique has distinctions to detect multiple bubbles along with its beginning and ending point. Oil is extremely significant due to its strategic position and several factors influence OP. The outcomes display the existence of bubbles which imply that OP deviates three times. This indicates the beginning and termination of bubbles coincide with a particular crisis. The expansion of the world economy, the mismatch between demand-supply of oil, dollar depreciation, excess supply by Organization of the Petroleum Exporting Countries, shale oil production of the U.S., and low demand by the emerging economies are the leading factors of OP bubbles. The main contributions are the investigation of the OP bubble, its determinants and the different technique of GSADF to detect OP bubbles. Moreover, the greater economic certainty and political stability ensure a smooth supply of OP can lessen unexpected fluctuation. The symmetric information can minimize market speculation, improve market efficiency, help investors make reasonable investment decisions, and minimize potential price risks.

Overreaction in the REITs Market: New Evidence from Quantile Autoregression Approach

Real estate investment trusts (REITs) provide portfolio diversification and tax benefits, a stable stream of income, and inflation hedging to investors. This study employs a quantile autoregression model to investigate the dependence structures of REITs’ returns across quantiles and return frequencies. This approach permits investigation of the marginal and aggregate effects of the sign and size of returns, business cycles, volatility, and REIT eras on the dependence structure of daily, weekly, and monthly REIT returns. The study documents asymmetric and misaligned dependence patterns. A bad market state is characterized by either positive or weakly negative dependence, while a good market state is generally marked by negative dependence on past returns. The results are consistent with under-reaction to good news in a bad state and overreaction to bad news in a good state. Past negative returns increase and decrease the predictability of REIT returns at lower and upper quantiles, respectively. Extreme positive returns in the lower (upper) quantiles dampen (amplify) autocorrelation of daily, weekly, and monthly REIT returns. The previous day’s REIT returns dampen autoregression more during recession periods than during non-recession periods. The marginal impact of the high volatility of daily returns supports a positive feedback trading strategy. The marginal impact of the Vintage REIT era on monthly return autocorrelation is higher than the New REIT era, suggesting that increased participation of retail and institutional investors improves market efficiency by reducing REITs’ returns predictability. Overall, the evidence supports the time-varying efficiency of the REITs markets and adaptive market hypothesis. The predictability of REIT returns is driven by the state of the market, sign, size, volatility, and frequency of returns. The results have implications for trading strategies, policies for the real estate securitization process, and investment decisions.