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Liquidity and market efficiency: Analysis of NASDAQ firms

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  • Chung, Dennis Y.
  • Hrazdil, Karel
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    Abstract

    We analyze all NASDAQ firms with respect to their short-horizon return predictability, which Chordia et al. (2008) formulate as an inverse indicator of market efficiency. Our results confirm that increased liquidity enhances market efficiency, and show that this effect is amplified during periods with new information. After controlling for liquidity and information effects, we find that NASDAQ firms experience an improvement in market efficiency only from the sixteenth to the decimal tick size regimes. We further demonstrate that inferences of market efficiency are not uniform across the different portfolios formed on the basis of trading frequency, volume and market capitalization.

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    Bibliographic Info

    Article provided by Elsevier in its journal Global Finance Journal.

    Volume (Year): 21 (2010)
    Issue (Month): 3 ()
    Pages: 262-274

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    Handle: RePEc:eee:glofin:v:21:y:2010:i:3:p:262-274

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    Web page: http://www.elsevier.com/locate/inca/620162

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    Keywords: Liquidity Return predictability Market efficiency NASDAQ;

    References

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    1. Fink, Jason & Fink, Kristin E. & Weston, James P., 2006. "Competition on the Nasdaq and the growth of electronic communication networks," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2537-2559, September.
    2. Lin, Ji-Chai & Sanger, Gary C & Booth, G Geoffrey, 1995. "Trade Size and Components of the Bid-Ask Spread," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1153-83.
    3. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
    4. Masulis, Ronald W. & Shivakumar, Lakshmanan, 2002. "Does Market Structure Affect the Immediacy of Stock Price Responses to News?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(04), pages 617-648, December.
    5. Richard R. Mendenhall, 2004. "Arbitrage Risk and Post-Earnings-Announcement Drift," The Journal of Business, University of Chicago Press, vol. 77(4), pages 875-894, October.
    6. Schultz, Paul, 2000. "Regulatory and Legal Pressures and the Costs of Nasdaq Trading," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 917-57.
    7. Hans R. Stoll, 2006. "Electronic Trading in Stock Markets," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 153-174, Winter.
    8. Loughran, Tim, 1993. "NYSE vs NASDAQ returns : Market microstructure or the poor performance of initial public offerings?," Journal of Financial Economics, Elsevier, vol. 33(2), pages 241-260, April.
    9. Rakowski, David & Wang Beardsley, Xiaoxin, 2008. "Decomposing liquidity along the limit order book," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1687-1698, August.
    10. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
    11. Aktas, Nihat & de Bodt, Eric & Van Oppens, Hervé, 2008. "Legal insider trading and market efficiency," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1379-1392, July.
    12. Bernard, Victor L. & Thomas, Jacob K., 1990. "Evidence that stock prices do not fully reflect the implications of current earnings for future earnings," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 305-340, December.
    13. Alexander, Gordon J. & Peterson, Mark A., 1999. "Short Selling on the New York Stock Exchange and the Effects of the Uptick Rule," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 90-116, January.
    14. Visaltanachoti, Nuttawat & Yang, Ting, 2010. "Speed of convergence to market efficiency for NYSE-listed foreign stocks," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 594-605, March.
    15. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
    16. Chung, Dennis & Hrazdil, Karel, 2010. "Liquidity and market efficiency: A large sample study," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2346-2357, October.
    17. Reinganum, Marc R., 1990. "Market microstructure and asset pricing : An empirical investigation of NYSE and NASDAQ securities," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 127-147.
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    Cited by:
    1. Diana Muresan, 2012. "Retrospective Of Financial Reporting On Capital Market," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(14), pages 8.
    2. Chung, Dennis Y. & Hrazdil, Karel, 2012. "Speed of convergence to market efficiency: The role of ECNs," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 702-720.
    3. Raphael Flepp & Stephan Nüesch & Egon Franck, 2013. " Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry," Working Papers 341, University of Zurich, Department of Business Administration (IBW).
    4. Carrion, Allen, 2013. "Very fast money: High-frequency trading on the NASDAQ," Journal of Financial Markets, Elsevier, vol. 16(4), pages 680-711.

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