Financial Market Design and Equity Premium: Electronic Versus Floor Trading
42 Pages Posted: 29 Nov 2003
Date Written: February 2004
We assemble the dates of announcement and actual introduction of electronic trading by the leading exchange of 118 countries to examine the long term and medium term impact of automation. The dividend growth model suggests a decline in expected returns by 0.08% per month after the introduction of electronic trading. Consistent with this reduction in equity premium in the long run, there is a positive short-term price reaction to the switch. These findings are sustained even after controlling for risk factors, financial integration, economic liberalization, and economic development. The results support the notion that electronic trading enhances the liquidity and informativeness of stock markets leading to a reduction in illiquidity premium.
Keywords: stock exchanges, computerized trading
JEL Classification: G14, G15
Suggested Citation: Suggested Citation