The Dynamics of Market Efficiency
Review of Financial Studies, Forthcoming
69 Pages Posted: 21 May 2012 Last revised: 30 Jun 2016
Date Written: May 4, 2016
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: Suggested Citation