Market Efficiency and Liquidity Defended on Friday, 18 December 2015

The main theme of this thesis is to investigate the interaction between market efficiency and liquidity. In particular to document time- and cross-sectional variation in market efficiency, and whether individual stock efficiency co-moves with aggregate market efficiency; to investigate why inefficiencies arise and how trading against these inefficiencies affects market liquidity. Theory predicts that arbitrage improves financial market liquidity when arbitrage opportunities arise as a result of temporary demand shocks and worsens liquidity when arbitrage opportunities arise as a result of differences in information. My analysis suggests that around 70% of the arbitrage opportunities arise as a result of demand shocks. Consistent with theory, I then show that an increase in arbitrage activity is associated with a reduction in market order imbalance and an improvement in liquidity.

Keywords

market efficiency, arbitrage, liquidity, fragmentation, market integration, return predictability, commonality, informed trading, private information, portfolio optimization model

Preferred reference

Rösch, D.M. (2015, December 18). Market Efficiency and Liquidity (No. EPS-2015-353-FA). ERIM Ph.D. Series Research in Management. Erasmus University Rotterdam. Retrieved from hdl.handle.net/1765/79121


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