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On the Static Efficiency of Secondary Bond Markets

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Author Info

  • Oxelheim, Lars

    ()
    (Department of Business Administration, School of Economics and Management, Lund University)

  • Rafferty, Michael

    ()
    (University of Western Sydney)

Abstract

Efficiency in the context of financial markets can be defined in many ways. The major strand of finance literature measures the market's ability to process information into prices. Another strand of literature refers to the economists' usual sense of the word, i.e. that markets ensure that resources are allocated to their most profitable use, and provide services at the lowest cost in terms of the resources employed. This paper, deploying the second definition, suggests a concept of static efficiency and claims that this efficiency can also be seen as a measure of the quality of a market. The paper develops a measure of qualitative static efficiency for bond markets built on four indicators: transparency, number of maturities and issuers, spread, and liquidity. Indicators of market quality should be easily accessible by those that are intending to use it. Using Nordic markets as case studies, we show that these markets became more economically efficient during the 1990's, but that transparency of efficiency remains a problem.

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Bibliographic Info

Paper provided by Lund University, Institute of Economic Research in its series Working Paper Series with number 2001/7.

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Length: 22 pages
Date of creation: 22 Feb 2002
Date of revision:
Handle: RePEc:hhb:lufewp:2001_007

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Postal: Institutet för Ekonomisk Forskning, Box 7080, SE-220 07 LUND, Sweden
Phone: +46 46-222 32 61
Fax: +46 46-222 34 06
Web page: http://www.lri.lu.se/
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Keywords: Key words: efficiency; transparency; market liquidity; bond markets.;

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References

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  2. Stiglitz, Joseph E, 1981. "Pareto Optimality and Competition," Journal of Finance, American Finance Association, vol. 36(2), pages 235-51, May.
  3. Oxelheim, Lars & Rafferty, Michael, 2005. "On the static efficiency of secondary bond markets," Journal of Multinational Financial Management, Elsevier, vol. 15(2), pages 117-135, April.
  4. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  6. Edith S. Hotchkiss & Tavy Ronen, 2002. "The Informational Efficiency of the Corporate Bond Market: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1325-1354.
  7. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
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  9. Hirotaka Inoue, 1999. "The Structure of Government Securities Markets in G10 Countries: Summary of Questionnaire Results," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-22 Bank for International Settlements.
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  13. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 73-114, June.
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  16. Huang, Roger D. & Stoll, Hans R., 2001. "Tick Size, Bid-Ask Spreads, and Market Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 503-522, December.
  17. Arnaud Marès, 2002. "Market liquidity and the role of public policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 385-401 Bank for International Settlements.
  18. Boudoukh, Jacob & Whitelaw, Robert F, 1993. "Liquidity as a Choice Variable: A Lesson from the Japanese Government Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 265-92.
  19. Maureen O'Hara, 2001. "Overview: market structure issues in market liquidity," BIS Papers chapters, in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 1-8 Bank for International Settlements.
  20. David C. Wheelock & Paul W. Wilson, 1995. "Evaluating the efficiency of commercial banks: does our view of what banks do matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 39-52.
  21. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  22. Meredith Beechey & David Gruen & James Vickery, 2000. "The Efficient Market Hypothesis: A Survey," RBA Research Discussion Papers rdp2000-01, Reserve Bank of Australia.
  23. Theissen, Erik, 2000. "Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets," Journal of Financial Markets, Elsevier, vol. 3(4), pages 333-363, November.
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  25. Sugato Chakravarty & Asani Sarkar, 1999. "Liquidity in U.S. fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets," Staff Reports 73, Federal Reserve Bank of New York.
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Cited by:
  1. Oxelheim, Lars & Rafferty, Michael, 2005. "On the static efficiency of secondary bond markets," Journal of Multinational Financial Management, Elsevier, vol. 15(2), pages 117-135, April.
  2. Andrén, Niclas & Oxelheim, Lars, 2002. "Exchange-Rate and Interest-Rate Driven Competitive Advantages in the EMU," Working Paper Series 2001/8, Lund University, Institute of Economic Research.

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