The Dynamics of Market Efficiency

Dominik M. Rösch; Avanidhar Subrahmanyam; Mathijs A. Van Dijk

doi:10.1093/rfs/hhw085

The Dynamics of Market Efficiency

Dominik M. Rösch¹; Avanidhar Subrahmanyam²; Mathijs A. Van Dijk³

¹ State University of New York, Buffalo · ² University of California, Los Angeles · ³ Rotterdam School of Management Erasmus University

Review of Financial Studies 2017 open access

We study the dynamics of high-frequency market efficiency measures. We provide evidence that these measures comove 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.

DOI: 10.1093/rfs/hhw085
Volume: 30 (4)
Pages: 1151-1187
Language: en
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