(How) has the market become more efficient?

Stephen Bertone, Imants Paeglis and Rahul Ravi

Journal of Banking & Finance, 2015, vol. 54, issue C, 72-86

Abstract: Using a portfolio of Dow Jones Industrial Average index constituents and the index ETF, we document significant intraday deviations from the law of one price. These are especially pronounced at very short time intervals. The extent of deviations is related to volatility, liquidity, and transaction costs of both the index constituents and the ETF. Further, the influence of news arrival, and liquidity (volatility) shocks on the deviations persists for several hours. Finally, we document significant decline (by at least 80%) in the deviations between 1998 and 2010. We find that this decline is largely due to decimalization, the repeal of the uptick rule, and the introduction of automated updating of the NYSE order book. Overall, our findings indicate an increase in operational market efficiency.

Keywords: Law of one price; Market efficiency; High frequency trading; ETF (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:54:y:2015:i:c:p:72-86

DOI: 10.1016/j.jbankfin.2014.12.019

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