Chen, J., Haboub, A. and Khan, A. (2023) Limits of arbitrage and their impact on market efficiency: Evidence from China. Global Finance Journal. 59 1044-0283.
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Abstract:
This paper examines the impact of limits of arbitrage (LOA) on market efficiency by considering a large sample of Chinese stocks. Intraday market efficiency is measured using two widely used measures: the intraday return predictability measure and the variance ratio measure. We find that LOA plays a major role in driving market efficiency. We also use an exogenous shock, the introduction of Shenzhen Stock Connect, which increases trade volume and lowers LOA, to examine the impact of LOA on market efficiency. Our results indicate that this event improves market efficiency regarding both our measures. Therefore, we conclude that policy makers in China are acting in the right direction to elevate China's status in world markets by adapting policies that inherently make the country more attractive to global investors by lowering LOA and enhancing market efficiency.
Uncontrolled Keywords:
Limits of arbitrage, Market efficiency, Chinese stock market, Intraday return predictability, High-frequency trading
Creators:
Chen, J., Haboub, A. and Khan, A.
Faculties, Divisions and Institutes:
Date:
11 December 2023
Date Type:
Publication
Journal or Publication Title:
Global Finance Journal
Volume:
59
Number of Pages:
2159746
Language:
English
ISSN:
1044-0283
Status:
Published / Disseminated
Refereed:
Yes
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