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; Erasmus University - Rotterdam School of Management

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

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

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

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)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

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 School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
460
rank
57,563
Abstract Views
2,418
PlumX Metrics