Evidence on the Speed of Convergence to Market Efficiency

Posted: 6 Oct 2004

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Avanidhar Subrahmanyam

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

Richard Roll

California Institute of Technology

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Abstract

Daily returns for stocks listed on the New York Exchange (NYSE) are not serially dependent. In contrast, order imbalances on the same stocks are highly persistent from day to day. These two empirical facts can be reconciled if sophisticated investors react to order imbalances within the trading day by engaging in countervailing trades sufficient to remove serial dependence over the daily horizon. How long does this actually take? The pattern of intra-day serial dependence, over intervals ranging from five minutes to one hour, reveals traces of efficiency-creating actions. For the actively traded NYSE stocks in our sample, it takes longer than five minutes for astute investors to begin such activities. By thirty minutes, they are well along on their daily quest.

Keywords: Market efficiency, order imbalances, autocorrelations

JEL Classification: G12, G14

Suggested Citation

Chordia, Tarun and Subrahmanyam, Avanidhar and Roll, Richard W., Evidence on the Speed of Convergence to Market Efficiency. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=600121

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

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

Richard W. Roll (Contact Author)

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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