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Emerging Markets and Trading Costs

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  • Mouna Cherkaoui
  • Eric Ghysels

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Abstract

To enhance our understanding of emerging markets we study a data set containing all the transaction records over a long span. The market, which was included in 1996 in the International Finance Corporation (IFC) data base roughly three years after important market reforms, operated under a dual trading system, consisting of an upstairs market for large block trades and a trading floor exchange. Transactions were recorded separately for both segments of the market. Effective spreads as well as the price impact of large block trades are examined. We test whether the costs of trading have significantly changed since the stock market microstructure reforms. We uncover prohibitively expensive trading costs which are temporary, yet last for over a year and coincide with the incoporation of the market into the IFC data base. This temporary effect is followed by transaction costs roughly equal to the pre-reforms era. The results we obtain do not support the conventional wisdom that market transparency and trading costs enhance, at least directly, the emergence of a market. Afin d'accroître notre compréhension des marchés émergents nous analysons une base de données incluant toutes les transactions effectuées sur une longue période. Le marché, qui, trois années après avoir connu d'importantes réformes, a été introduit en 1996 dans la base de données de la Société Financière Internationale (SFI), fonctionne selon un système d'échange dual qui consiste en un marché pour les transactions de bloc et un marché central. Les transactions ont été enregistrées séparément pour chacun des segments du marché. Les fourchettes effectives ainsi que l'impact des transactions de bloc sur les prix sont examinés. Nous vérifions si les coûts de transaction ont changé de manière significative depuis les réformes de microstructures. Nous trouvons des coûts de transaction élevés et prohibitifs qui sont temporaires0501s durent néanmoins plus d'une année et coïncident avec l'incorporation du marché à la base de données de la SFI. Cet impact temporaire est suivi de coûts de transaction à peu prés égaux à ceux de la période précédant la réforme. Les résultats que nous obtenons n'appuient pas l'idée conventionnelle selon laquelle la transparence des marchés et les coûts de transaction rehaussent, au moins directement, l'émergence du marché.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 99s-04.

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Date of creation: 01 Feb 1999
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Handle: RePEc:cir:cirwor:99s-04

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Keywords: Market structures; emerging markets; Structures de marchés; marchés émergents;

References

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  1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
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  8. Ghysels, Eric & Guay, Alain & Hall, Alastair, 1998. "Predictive tests for structural change with unknown breakpoint," Journal of Econometrics, Elsevier, vol. 82(2), pages 209-233, February.
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  11. Michael J. Fleming & Eli M. Remolona, 1996. "Price formation and liquidity in the U.S. treasuries market: evidence from intraday patterns around announcements," Research Paper 9633, Federal Reserve Bank of New York.
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  16. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
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Cited by:
  1. Ghysels, Eric & Cherkaoui, Mouna, 2003. "Emerging markets and trading costs: lessons from Casablanca," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 169-198, February.

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