Measure Of Market Efficiency Research Articles

Cross-country determinants of market efficiency: A technical analysis perspective

This study examines the relative impact of seven factors, including herding, sentiments, and institutional quality, on varying levels of weak form market efficiency across 50 stock markets. The analysis focuses on the profitability of technical analysis trading strategies to address issues with other (statistical) market efficiency measures related to information and transaction costs (Griffin et al., 2010). Proxies for herding, institutional quality, and equity market development consistently emerge as the most significant cross-country determinants of relative market efficiency. In contrast, proxies for fractionalization, chaos, and investor protection play comparatively weaker roles. We also find no clear link between market efficiency and sentiment proxies.

A new look at financial markets efficiency from linear response theory

In this paper we propose a new measure of market efficiency based on the average response of a market price after a market event by using Linear Response Theory. It is shown that the average response to an event in different markets agrees fairly well with this theory’s prediction from equilibrium data in absence of external forces or events. In this work it is first found that Linear Response efficiently resolves price dynamics at moderately perturbed financial markets of different types. Namely we study Forex markets, the S&P500 index, Commodities markets and the Bitcoin-US dollar one. Furthermore, we determine a measure of market inefficiency, which can be used to compare the inefficiency between different assets and securities.

Emerging economies openness and efficiency

The objective of this study is to examine the impact of economic openness on the efficiency of 25 emerging stock markets. By employing two measures of market efficiency, variance ratios with different time lags and short‐run reversal returns, we find that in majority of the emerging markets in our sample, there is strong evidence to show that the market efficiency improves with market openness. This effect is robust and stronger when we measure variance ratio with longer horizons. When using the reversal returns to measure efficiency, the results are weaker. However, there is no evidence showing that liberalization of the market would impede the market efficiency. The overall results suggest that market openness reduces a stock price's departure from a random walk.

Market efficiency and the capacity of stock prices to track a firm's future profitability

This study assesses the link between market efficiency proxies and the capacity of stock prices to anticipate a firm's future economic performance. The analysis, which covers firms from 31 countries in the period 1990–2019, reveals a strong association between the average score of market efficiency proxies and the sensitivity of current stock returns (“normalized” prices) to future profitability. These results are robust to several sensitivity tests, including different definitions of the profitability measure (earnings, cash flows, firm-specific earnings and ROA). Further analysis unveils heterogeneity in the association between popular proxies of market efficiency and the sensitivity of current stock returns (“normalized” prices) to future profitability. The signal-to-noise ratio and the partial adjustment coefficient are the market efficiency measures that display a higher association with the capacity of stock prices to track future profitability. Critically, other indicators display a weak association after controlling the effect of liquidity or the information environment.

Time varying market efficiency in the Brent and WTI crude market

This paper examines time-varying market efficiency in the crude oil spot market using a recently derived measure of market efficiency: the Adjusted Market Inefficiency Model (AMIM). Analysing efficiency in the crude oil market, and its response to significant events within the global financial and commodity market, we identify that the Brent market is on average more efficient than the West Texas Intermediate (WTI). We also find that the WTI market is persistently inefficient during financial crises, with high volatility of the efficiency in such periods. In addition to confirming the adaptive market hypothesis, this study offers a new perspective by highlighting the non-uniform response of efficiency in similar markets to global events.

Outstandingly High Values of the Market Value Ratios as a Symptom of Market Informational Inefficiency: A Study on the Warsaw Stock Exchange

Purpose: The purpose of this article is to examine whether the outstandingly high values of the market value ratios co-occurring with low levels of weak-form informational efficiency proxied by the percentage of the stock returns normality tests in which the null hypothesis could not be rejected. Methodology: The weak-form informational efficiency measure used in the study is based on the strict random walk model proposed by Bachelier. The data collected covered the period from 31/12/2016 to 23/03/2020 and contained financial data of the companies listed on both stock markets of the Warsaw Stock Exchange (WSE), i.e. on the Main Market and NewConnect. The empirical study consisted in comparing the average market value ratios and the market efficiency measures calculated for both the WSE sectors and subsectors. Findings: The analysis of the scatterplots as well as the analysis of the correlation coefficients suggest that the outstandingly high values of the market value ratios do not co-occur with low levels of weakform informational efficiency. Thus, the outstandingly high values of the market value ratios cannot be treated as any clear indication of market inefficiency. Research limitations: The authors encourage other researchers to test weak-form informational efficiency under more general conditions and repeat the study for other datasets. Value: According to the authors’ knowledge, it is the first study making an attempt to capture any connection between the extremely high values of the market value ratios and quantified informational market efficiency in a weak form.

The role of market efficiency on implied cost of capital estimates: an international perspective

This study examines the role of market efficiency on international differences in the usefulness of the implied cost of capital (ICC) to measure expected stock returns. The analysis exploits cross-country differences in market efficiency around the world using a variety of empirical measures of market efficiency. A key methodological contribution of this paper is to assess the quality of the ICC as estimate of expected returns by evaluating its forecast error for subsequent stock returns. The results show that the accuracy of the ICC as measure of expected stock returns is positively associated with the countries’ level of market efficiency.

Objective Measures of Market Efficiency; Applications to Securities Class Actions and Valuations

For every U.S.-listed security for every year between 2001-2017, I run four different event studies to calculate four separate objective measures of the efficiency of the market for that security for that year, which provide an objective characterization of the market for that security in that year to be sufficiently efficient or otherwise. I apply these methodologies to Petrobras's ADR (PBR on NYSE) in 2001-2017, and conclude that the Petrobras Court got it partially right and partially wrong when it certified a 2010-2015 class period, because the market for PBR was sufficiently efficient in 2010, 2011, and 2014 and not sufficiently efficient in 2012, 2013, and 2015. I apply these methodologies to the valuation of each U.S.-listed firm in 2001-2017; here are three examples: a) the market for GS (Goldman Sachs Group, Inc., common equity) was sufficiently efficient in each year in 2001-2017, and therefore, market prices represented value for Goldman Sachs over 2001-2017, b) the market for MSFT (Microsoft Corporation, common equity) was sufficiently efficient in 2001 and 2003-2017, and therefore, market prices represented value for Microsoft Corporation in 2001-2017 except 2002, and c) the market for AAME (Atlantic American Corporation, common equity) was not sufficiently efficient in any year in 2001-2017, and therefore, market prices did not represent value for Atlantic American Corporation in 2001-2017.

The Role of Market Efficiency on Implied Cost of Capital Estimates - an International Perspective

This study examines the role of market efficiency on international differences in the usefulness of the implied cost of capital (ICC) to measure expected stock returns. The analysis exploits cross-country differences in market efficiency around the world using a variety of empirical measures of market efficiency. A key methodological contribution of this paper is to assess the quality of the ICC as estimate of expected returns by evaluating its forecast error for subsequent stock returns. The results show that the accuracy of the ICC as measure of expected stock returns is positively associated with the countries' level of market efficiency.

The impact of stock market manipulation on Nigeria\u2019s economic performance

This study is the first attempt to empirically analyse stock market manipulation on the Nigerian Stock Exchange and its consequences on economic performance. The empirical investigation employs a broad data set of 186 actual manipulation cases indicted by the Nigerian Security and Exchange Commission between 2002 and 2016. We embrace market microstructure analysis and the event study method to understand how various manipulation techniques impact on market measures, and the Error Correction Model to evaluate their economic effects. Manipulation is found to distort market efficiency measures (such as market capitalization, value traded ratio and All-Share Index) and genuine traders are forced to exit the market to avoid possible trading with a manipulator. Such huge divestment and the subsequent financial risk weaken the ability of the Stock Exchange market to improve economic performance, creating negative consequences at the post-manipulation period. Essentially, economic variables (such as the GDP) react negatively to manipulative trading. This finding is insightful and a prompt to the Securities and Exchange Commission to design policy responses towards deterring and prosecuting unfair trading practices or other activities that contravene the market rules.

Market enforcement under different legal regimes: a comparison of France and Canada

Building upon institutional theory, this study investigates whether and how market enforcement mediates the relationship between external (country-level) and internal (firm-level) corporate governance mechanisms. We focus on two countries with contrasting legal, regulatory and institutional regimes: Canada and France. Market enforcement is proxied by two measures of market efficiency: abnormal returns and price volatility. Our results suggest that external governance mechanisms interact with internal governance mechanisms via market enforcement, which differs greatly between both countries. Hence, the complementarity of internal and external governance mechanisms depends upon the nature and type of enforcement (i.e., emphasis on ex-ante monitoring and compliance vs. ex post sanctions).

A simple but powerful measure of market efficiency

We construct a simple measure to quantify the level of market efficiency. We apply this measure to investigate the level of market efficiency and analyze its variation over time. The main contribution of the new measure is that it makes it easy to compare market efficiency across assets, time, regions, and data frequencies. We find that markets are often efficient, but can be significantly inefficient over longer periods. Our empirical results indicates that in many periods of major economic events, financial markets becomes less efficient. This corroborates earlier results on market efficiency, and simplifies interpretation and comparisons.

How foreign investors influence stock markets? The Saudi Arabian experience

ABSTRACTThis paper investigates the impact of foreign institutional investors on valuation, liquidity and volatility in the Saudi stock exchange for the post-liberalization period. Saudi regulators allowed the foreign investment community to invest in the Tadawul All Share Index (TASI) in June 2015. Firstly, the paper finds a positive change in abnormal returns in the three-year post-liberalization period compared to the three-year non-liberalization period (pre-period), suggesting that the entry of qualified foreign institutional investors (QFIIs) benefited security valuation. Further, the higher valuation result is consistent with the prediction of standard international asset pricing models, that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents. Secondly, contrary to the regulators/policymakers’ intention and empirical evidence, the liquidity proxies document mixed evidence. Lastly, this study finds mixed evidence in the price volatility measures. However, the volatility and liquidity finding suggests that the presence of foreign institutional investors is not the source of excess volatility or high turnover on local bourses. Overall, the evidence, on average, shows some signs of improvement for different market efficiency measures during the post-liberalization period compared to the pre-liberalization period. The less than expected improvement in Tadawul during the post-period implies that the Saudi financial regulator’s incentive of opening the TASI for QFIIs coincides with economic vulnerabilities for the Kingdom, stringent QFIIs regulation and weak investor protection laws.

Liquidity and the convergence to market efficiency

ABSTRACTThe aim of this study is to investigate the relationship between market liquidity changes on the Johannesburg Stock Exchange (JSE) and the market’s degree of efficiency. Market efficiency is characterised in terms of two philosophies: Fama’s (1970) Efficient Markets Hypothesis (EMH), and Shiller’s (1981; 2003) informational efficiency designation. Efficiency was tested using measures of return predictability, a random walk benchmark and price volatility; liquidity was measured using market turnover. The tests were conducted on JSE Top 40 shares across three regimes, spanning January 2012–June 2016. The regimes are demarcated by two structural breaks in the JSE’s microstructure: the 2012 trading platform upgrade and the 2014 colocation centre launch. The results show that past order imbalances are a significant predictor of daily returns, although the significance of this predictability has dissipated over time. Return predictability is not influenced by liquidity. In fact, there is evidence that illiquidity weakens return predictability. Prices were closer to random walk benchmarks during the third regime. In consideration of informational efficiency, during the latter two regimes price volatility is greater during trading versus non-trading hours. This is coupled with an emergence of nonlinear return dependence, which is indicative of greater mispricing. Thus, over the three regimes, market efficiency improved in the sense of the EMH, but informational efficiency deteriorated. This study contributes to the field by: introducing an inverse measure of market efficiency; providing insight into the measure’s time variation and relation to liquidity; and demonstrating that market efficiency tests should incorporate the dual meanings of the term, enabling richer understanding of how such meanings intersect.

Game over? Assessing the impact of the emergence of a profitable wagering strategy in major league baseball wagering markets

ABSTRACTTesting the impact of profitable investment strategies is often hampered by the practical difficulties of determining who knew what, and when. This study examines the impact of the publication of a profitable wagering strategy on the Major League Baseball wagering market. While standard measures of market efficiency characterized the Major League Baseball win–loss moneyline market to be efficient, previous works shows that wagering on underdogs early in the season can generate persistent profits. Though the overall efficiency of the baseball wagering market remained after publication, these profitable opportunities dissipated. Bettor behaviour is found to play varying roles across different wagering strategies; up to half of the drop in returns can be attributed to wagering market participant behaviour.

Evaluation of Market Efficiency and Trading Behavior of Investors: Evidence From Borsa Istanbul

After the financial crisis of 2007-08, debates on structures and characteristics of financial markets have become the subject of much concern in both industry and academia. One of the most debated issues related to financial markets is whether they are efficient or not. With an intent to enter into discussions, this paper evaluates the market efficiency by using individual and institutional trade data from a specific stock exchange, namely Borsa Istanbul. To do so, we first form several measures of market efficiency through daily investor data covering five years. By using these measures, we show that there is a negative relationship between market efficiency and turnover. That is, the more efficient the market, the lower the turnover. This result contributes to the debate of irrationality of investor behavior. The data also suggests that the efficiency in Borsa Istanbul has been increasing after the crisis, showing that the effect of the crisis has been vanishing as time passes.

A Simple But Powerful Measure of Market Efficiency

A Simple But Powerful Measure of Market Efficiency

A Simple but Powerful Measure of Market Efficiency

We construct a simple measure to quantify the level of market efficiency. We apply this measure to investigate the level of market efficiency and analyze its variation over time. The main contribution of the new measure is that it makes it easy to compare market efficiency across assets, time, regions, and data frequencies. We find that markets are often efficient, but can be significantly inefficient over longer periods. Our empirical results indicates that in many periods of major economic events, financial markets becomes less efficient. This corroborates earlier results on market efficiency, and simplifies interpretation and comparisons.

Toward a model-free measure of market efficiency

This article aims to measure market efficiency without an information model. The intuition is that an efficient market leaves no arbitrage opportunities for active traders, so the measure of efficiency (MOE) is the proportion of profits available to passive traders for a given level of transaction costs. It is expressed as a percentage score and defined symmetrically with a measure of inefficiency (MOI). It can be computed sequentially from a price series and a round-trip transaction cost. The measure of efficiency is shown to increase with diversification, reduce in longer time periods, and have an inverse relation with volatility. It is shown to be a leading indicator of price movements on a day-to-day basis and ahead of the financial crisis of 2008.

Electronic Commerce, Spatial Arbitrage, and Market Efficiency

Electronic commerce can improve market efficiency by helping buyers and sellers find and transact with each other across geographic distance. We study the effect of two distinct forms of electronic commerce on market efficiency, which we measure via the existence and exploitation of spatial arbitrage opportunities. Spatial arbitrage represents a more precise measure of market efficiency than does price dispersion, which is typically used, because it accounts for the transaction costs of trading across distance and for unobserved product heterogeneity. One of the forms of electronic commerce that we study is a webcast channel that allows electronic access to the traditional physical market, while the other is a standalone electronic market. Both forms provide traders with expanded reach to find and transact with each other across geographic distance, but only one allows traders to conduct transactions immediately, at any time. This variance helps us isolate the effect of these mechanisms (reach and transaction immediacy) on efficiency. We find that electronic commerce reduces the number of arbitrage opportunities (likely by expanding traders’ geographic reach) but improves arbitrageurs’ ability to identify and exploit those that remain (likely by expanding arbitrageurs’ reach and providing them with the immediacy to exploit opportunities quickly). Overall, our results suggest that electronic commerce improves market efficiency not only by helping buyers and sellers transact across distance (thereby balancing supply and demand across geographic locations) but also by helping arbitrageurs quickly exploit any remaining arbitrage opportunities (thereby rebalancing supply and demand across geographic locations).