Dynamic Stock Markets with Multiple Assets: An Experimental Analysis

We study the performance of the rational expectations hypothesis in multiperiod experimental markets with multiple assets. We find that the markets are generally inefficient from the point of view of full information aggregation. However, arbitrage relationships hold, and it is not possible to detect the informational inefficiency by using some standard tests of market efficiency. These findings suggest that the lack of arbitrage opportunities and the failure of common tests to reject inefficiency are not sufficient to conclude that a market is informationally efficient.     

Does Bitcoin still own the dominant power? An intraday analysis

The study investigates the intraday dynamics and price patterns of the primary cryptocurrencies. The Granger Mackey-Glass (M-G) model is employed to examine the asymmetric and nonlinear dynamic interactions in the first moment using positive and negative returns. The bivariate BEKK-GARCH model is applied to identify cross-market volatility shocks and volatility transmissions in the cryptocurrency market. The intra-cryptocurrency market analysis reveals that Bitcoin contains predictive information that can nonlinearly forecast the performance of other digital currencies when cryptocurrency prices either are rising or declining. The dominant power of Bitcoin is not dismissed using the intraday data. Further, Bitcoin's intraday lagged shocks and volatility induces more rapid and destabilizing effects on the conditional volatility of other currencies than each of the other currencies does on BTC's conditional volatility. The virtual currency markets are dynamically correlated and integrated through first and second-moment spillovers.     

Measurement of market integration and arbitrage

We develop a measurement theory of market integration, basedon two notions of 'integrated markets'. First, two markets cannotbe perfectly integrated in any sense if one can construct twoportfolios, one from each market, that have identical payoffsbut different prices. In that case, the law of one price isviolated across the markets. Second, they cannot be integratedin a stronger sense if there are cross-market arbitrage opportunities.Two measures of market integration are developed, respectivelyreflecting these notions. The smaller the measures, the moreclosely integrated (in the respective senses) the markets. Amongother things, they are interpreted as measuring pricing discrepancybetween markets.     

Internal Market Efficiency,Market Co-movement,and Cross-Market Efficiency: The Case of Hong Kong and Shanghai Stock Markets

We examine the effects of the 2008 financial crisis on the cross-market efficiency of the Hong Kong and Shanghai stock markets. Our results show a sharp decline in the cross-market efficiency during the financial crisis. We investigate whether this is due to lower internal market efficiency or higher market co-movement. The results show no evidence that the internal market efficiency dropped in Hong Kong or Shanghai during the crisis. In contrast, we document a strong increase in the market co-movement during the crisis. These results suggest that the decline in cross-market efficiency during the financial crisis is due to increased market co-movement and not a decline in internal market efficiency.     

Long-run dynamics of official and black-market exchange rates in Latin America

This paper attempts to investigate the long-run dynamic relationship between official and black-market exchange rates for four Latin America markets namely, Argentina, Brazil, Chile, and Mexico. We follow (Moore, M. J., & Phylaktis, K. (2000). Black and official exchange rates in the Pacific Basin: Some tests of dynamic behaviour. Applied Financial Economics, 10, 361–369.) and we distinguish between long-run informational efficiency and short-run predictability in a sense that these notions are compatible with cointegration and error-correction mechanisms (ECM). Our findings indicate a constant black-market premium for each country, which is taken as strong support for long-run informational efficiency between the official and black markets for foreign currency. In addition, the evidence of short-run predictability is not considered as a violation of market efficiency, but it is the outcome of optimal arbitrage by rational economic agents.     

Long-run dynamics of official and black-market exchange rates in Latin America

This paper attempts to investigate the long-run dynamic relationship between official and black-market exchange rates for four Latin America markets namely, Argentina, Brazil, Chile, and Mexico. We follow (Moore, M. J., & Phylaktis, K. (2000). Black and official exchange rates in the Pacific Basin: Some tests of dynamic behaviour. Applied Financial Economics, 10, 361–369.) and we distinguish between long-run informational efficiency and short-run predictability in a sense that these notions are compatible with cointegration and error-correction mechanisms (ECM). Our findings indicate a constant black-market premium for each country, which is taken as strong support for long-run informational efficiency between the official and black markets for foreign currency. In addition, the evidence of short-run predictability is not considered as a violation of market efficiency, but it is the outcome of optimal arbitrage by rational economic agents.     

STOCK MARKET OPENNESS AND MARKET QUALITY: EVIDENCE FROM THE SHANGHAI–HONG KONG STOCK CONNECT PROGRAM

We study the impact of capital market openness on high-frequency market quality in China. The Shanghai–Hong Kong Stock Connect program (SHHKConnect) opens China's stock market to foreign investors and offers a natural experiment to investigate this question. Using a difference-in-differences approach, we find that market liberalization leads to lower quoted spread, lower effective spread, lower market depth, and higher short-term volatility. Our findings imply that opening the markets to more sophisticated foreign investors is associated with higher competition and more cross-market arbitrage activities, narrowing the spread and reducing liquidity providers’ profits, but increasing the price impact and short-term volatility of connected stocks.     

The efficiency of Bitcoin: A strongly typed genetic programming approach to smart electronic Bitcoin markets

Cryptocurrencies have gained a lot of attention since Bitcoin was first proposed by Satoshi Nakamoto in 2008, highlighting the potential to play a significant role in e-commerce. However, relatively little is known about cryptocurrencies, their price behaviour, how quickly they incorporate new information and their corresponding market efficiency. To extend the current literature in this area, we develop four smart electronic Bitcoin markets populated with different types of traders using a special adaptive form of the Strongly Typed Genetic Programming (STGP)-based learning algorithm. We apply the STGP technique to historical data of Bitcoin at the one-minute and five-minute frequencies to investigate the formation of Bitcoin market dynamics and market efficiency. Through a plethora of robust testing procedures, we find that both Bitcoin markets populated by high-frequency traders (HFTs) are efficient at the one-minute frequency but inefficient at the five-minute frequency. This finding supports the argument that at the one-minute frequency investors are able to incorporate new information in a fast and rationale manner and not suffer from the noise associated with the five-minute frequency. We also contribute to the e-commerce literature by demonstrating that zero-intelligence traders cannot reach market efficiency, therefore providing evidence against the hypothesis of Hayek (1945; 1968). One practical implication of this study is that we demonstrate that e-commerce practitioners can apply artificial intelligence tools such as STGP to conduct behaviour-based market profiling.     

Studying the properties of the Bitcoin as a diversifying and hedging asset through a copula analysis: Constant and time-varying

In this study, we analyze the properties of Bitcoin as a diversifier asset and hedge asset against the movement of international market stock indices: S&P500 (US), STOXX50 (EU), NIKKEI (Japan), CSI300 (Shanghai), and HSI (Hong Kong). For this, we use several copula models: Gaussian, Student-t, Clayton, Gumbel, and Frank. The analysis period runs from August 18, 2011 to June 31, 2019. We found that the Gaussian and Student-t copulas are best at fitting the structure dependence between markets. Also, these copulas suggest that under normal market conditions, Bitcoin might act as a hedge asset against the stock price movements of all international markets analyzed. However, the dependence on the Shanghai and Hong Kong markets was somewhat higher. Also, under extreme market conditions, the role of Bitcoin might change from hedge to diversifier. In a time-varying copula analysis, given by the Student-t copula, we found that even under normal market conditions, for some markets, the role of Bitcoin as a hedge asset might fail on a high number of days.     

Trading activity and price discovery in Bitcoin futures markets

This study examines the impact of trading activities on price discovery in the Bitcoin futures markets. We find that trades of hedgers are positively correlated with the modified information shares in both CME and CBOE futures markets, suggesting that their trading promotes futures market efficiency. Retailers’ trading activity relates negatively to the price discovery of the CME Bitcoin futures and thus destabilizes the market. Speculators exert positive (negative) impact on the price discovery in the CME (CBOE) Bitcoin futures. Our finding that CME’s Bitcoin futures exhibit superior price discovery than CBOE’s provides plausible justification for CBOE’s decision in March 2019 to suspend further listings of Bitcoin futures contracts.     

Mispricing and lasting arbitrage between parallel markets in the Czech Republic

If co-existing parallel markets are efficient, then arbitrage will maintain a correct pricing relationship. A related question is whether two parallel emerging markets offering more or less the same securities but using different institutional designs, can behave as a single, fully integrated market. In this paper an explicit model of price convergence (with transaction costs) is introduced, in which price differences are studied using levels of arbitrage activity. For the empirical analysis two parallel markets in the Czech Republic are used — the Prague Stock Exchange (PSE) and the RMS (over-the-counter system). In particular, the degree of arbitrage activity is studied for different segments of the PSE and the evolution of arbitrage in the early history of these emerging markets. The empirical results provide evidence of market linkage for actively traded stocks. A significant relationship is found between the segment of the market to which a given firm belongs and the estimated level of arbitrage trading. Moreover, the level of arbitrage activity increases over time for all market segments, and as the markets mature, the differences among the segments gradually disappear.     

Short Selling and Index Arbitrage Profitability: Evidence from the SGX MSCI and TAIFEX Taiwan Index Futures Markets

There are numerous impediments to market efficiency and index arbitrage in real capital markets, including the uptick rule on short selling, execution risk, market impact costs, regulatory barriers, and capital constraints. Adopting and relaxing the uptick restriction in the Taiwan stock market facilitated a study on whether adjustments in this restriction influence the efficiency and arbitrage of the Singapore Exchange Limited (SGX) and the Taiwan Futures Exchange (TAIFEX) index futures markets. This study examines the above issues using five-minute intraday transaction data and performs an ex post test of arbitrage, ex ante test of arbitrage, and regression analysis. Empirical results indicate that relaxing the uptick rule should improve market efficiency and facilitate long arbitrage, subsequently accelerating the adjustment to no-arbitrage bounds and helping to decrease ex post and ex ante mispricing and underpricing following the relaxation.     

Arbitrage risk and market efficiency

This article explores arbitràge risk and models a testable hypothesis for studies in the treasury bill futures market efficiency. The modern mean-variance theory applied to a hedged arbitrage portfolio is used for the analysis. For a given expected arbitrage profit, we derive minimum variance arbitrage (MVA) conditions. A minimum variance arbitrage line (MVAL) is then derived to show the risk-return tradeoff for arbitrage. Market efficiency conditions are discussed by taking into account arbitrage risk along with bid-ask spreads. The analysis in this study helps explain the puzzle of inefficiencies in the T-bill futures market. Because refinancing and variation margin (due to marking-to-market) are required for arbitrage using futures trading in general, our ex ante arbitrage model using the case of T-bill futures can be applied to other futures markets.     

人民币外汇市场弱式有效性的鞅差分检验

外汇市场弱式有效是受到国际学术界广泛关注的一个研究课题,因为它不同于其他市场的有效性,它直接关系到套汇、国际收支、外汇储备、汇率制度和货币政策等各个方面。但是市场弱式有效的数学表述及其检验方法一直都有分歧,本文采用近年来比较常用的鞅差分检验,并用Kuan and Lee(2004)的方法来检验人民币外汇市场的弱式有效性,实证结果表明人民币对美元和港币外汇市场没有达到弱式有效,对其他货币外汇市场弱式有效性值得怀疑,人民币汇率形成机制还存在一些问题需要解决。     

Positive asymmetric information in volatile environments: The black market dollar and sovereign bond yields in Venezuela

PurposeWe test the informational efficiency of Venezuelan USD sovereign bond yields when the black market exchange-rate premium (BMERP) changes.DesignWe use a non-parametric, asymmetric, Granger causality test to test our hypothesis.FindingsWe find that the bond market with less than or equal to 5 years of maturity seems to be efficient when good news is released on the BMERP. However, this market is not informationally efficient, and when combined with unbiased bad news regarding the BMERP, arbitrage opportunities are created.Originality/valueCapital controls that restrict free exchange-rate mechanisms create arbitrage opportunities with negative news as opposed to positive news.     

Capture the contagion network of bitcoin – Evidence from pre and mid COVID-19

COVID-19 is the first global scale crisis since the inception of Bitcoin. We compare the contagion phenomenon of Bitcoin and other financial markets or assets pre and during the COVID-19 shock in both contemporaneous and non-contemporaneous manner. This paper uses the directed acyclic graph (DAG), spillover index, and network topology to provide strong evidence on the directional contagion outcomes of Bitcoin and other assets. The empirical results show that the contagion effect between Bitcoin and developed markets is strengthened during the COVID-19 crisis. Particularly, European market has a dominant role. Excluding Bitcoin’s own shocks, United State and European markets are the main contagion sources to Bitcoin. European market also works as a intermediary to deliver infectious from United State and market fear. The findings show that gold always has contagion effect with Bitcoin, while gold, US dollar and bond market are the contagion receivers of Bitcoin under the shock of COVID-19. The empirical results further proved the safe haven, hedge and diversifier potential of Bitcoin in economic stable time, but also shows that the sustainability of these properties is undermined during the market turmoil.     

Efficiency in index options markets and trading in stock baskets

Researchers have reported mispricing in index options markets. This study further examines the efficiency of the S&P 500 index options market by testing theoretical pricing relationships implied by no-arbitrage conditions. The effect of a traded stock basket, Standard and Poor’s Depository Receipts (SPDRs), on the link between index and options markets is also examined. We find that pricing efficiency within option markets improves but there is little evidence to support the hypothesis that a stock basket enhances arbitrage across markets. When transactions costs and short sales constraints are included, very few violations of inter-market pricing relationships such as put–call parity are reported. However, violations of within market pricing relationships such as the box spread remain frequent. Extensive analysis suggests that the results are robust.     

The Behavior of an Institutional Investor with Arbitrage Opportunities and Liquidity Risk

This study analyzes the efficiency of liquidity flows in stabilizing distressed markets from a theoretical perspective. We show that even in the event of a major negative market shock, a financial institution can increase its investment in the market when there is a strong incentive for arbitrage profit. However, the institution may choose to reduce its investment if the fear from liquidity risk exceeds the arbitrage incentive. In addition, our model reveals a positive relationship between funding liquidity and market liquidity. Our findings help to explain several financial issues in distressed markets, including the flight to quality, liquidity dry-ups, asset fire sales, and market shock amplifications.     

Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market

We study the impact of algorithmic trading (AT) in the foreign exchange market using a long time series of high‐frequency data that identify computer‐generated trading activity. We find that AT causes an improvement in two measures of price efficiency: the frequency of triangular arbitrage opportunities and the autocorrelation of high‐frequency returns. We show that the reduction in arbitrage opportunities is associated primarily with computers taking liquidity. This result is consistent with the view that AT improves informational efficiency by speeding up price discovery, but that it may also impose higher adverse selection costs on slower traders. In contrast, the reduction in the autocorrelation of returns owes more to the algorithmic provision of liquidity. We also find evidence consistent with the strategies of algorithmic traders being highly correlated. This correlation, however, does not appear to cause a degradation in market quality, at least not on average.     

Put-call parity and the informational efficiency of the German DAX-index options market

Using transaction data for options on the German stock index (DAX), we examine the informational efficiency of this relatively new options market. Because DAX options are European style and the underlying index is a performance index, we avoid problems due to dividend estimation and the assessment of the early-exercise effect, which are encountered in existing studies. Ex-post and ex-ante tests are carried out to simulate trading strategies for exploiting put-call parity violations. We find that ex-post profits diminish dramatically when the implementation of the arbitrage strategies is delayed and/or after transaction costs are accounted for. In general, however, arbitrage restrictions, which rely on short selling of the component stocks of the index, tend to be violated more severely than those relying on long positions in these stocks. Given the short-selling restrictions in Germany, these apparent arbitrage opportunities cannot be easily exploited in practice. Furthermore, the results for different subsamples suggest that traders were subject to a learning process in pricing these relatively new instruments.