How does electronic trading affect efficiency of stock market and conditional volatility? Evidence from Toronto Stock Exchange

Shantanu Dutta, Naceur Essaddam, Vinod Kumar and Samir Saadi

Research in International Business and Finance, 2017, vol. 39, issue PB, 867-877

Abstract: The present paper investigates informational efficiency and changes in conditional volatility of the TSX before and after the implementation of an automated trading system on April 23, 1997. Using a battery of unit root, stationarity, as well as linear tests, we find that the introduction of electronic trading led to an increase in linearity dependence in TSX daily returns. In addition, when we examined the nonlinearity dependences using powerful econometric tests, we find that electronic trading has increased nonlinear dependencies in return series, which is the main cause of rejecting the Random Walk Hypothesis (RWH). Our results suggest that the automated trading system has negatively affected informational efficiency of the TSX. We also find evidence of long memory following automation which suggests that the introduction of electronic trading has increased the level of persistence of information and trading shocks.

Keywords: Automated trading; Random walk; Nonlinear dynamics; Conditional volatility (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:39:y:2017:i:pb:p:867-877

DOI: 10.1016/j.ribaf.2015.11.001

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