The Dynamics of Market Efficiency

Review of Financial Studies, Forthcoming

69 Pages Posted: 21 May 2012 Last revised: 30 Jun 2016

See all articles by Dominik Rösch

Dominik Rösch

State University of New York at Buffalo - School of Management

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Financial Research Network (FIRN)

Mathijs A. van Dijk

Erasmus University Rotterdam (EUR)

Date Written: May 4, 2016

Abstract

This paper studies the dynamics of high-frequency market efficiency measures. We provide evidence that these measures co-move across stocks and with each other, suggesting the existence of a systematic market efficiency component. In vector autoregressions, we show that shocks to funding liquidity (the TED spread), hedge fund assets under management, and a proxy for algorithmic trading are significantly associated with systematic market efficiency. Thus, stock market efficiency is prone to systematic fluctuations, and, consistent with recent theories, events and policies that impact funding liquidity can affect the aggregate degree of price efficiency.

Keywords: market efficiency, co-movement, funding liquidity, hedge funds, algorithmic trading

JEL Classification: G12, G14

Suggested Citation

Rösch, Dominik and Subrahmanyam, Avanidhar and van Dijk, Mathijs A., The Dynamics of Market Efficiency (May 4, 2016). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2062926 or http://dx.doi.org/10.2139/ssrn.2062926

Dominik Rösch

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Mathijs A. Van Dijk (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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