Limits of arbitrage and their impact on market efficiency: Evidence from China

Jian Chen; Ahmad Haboub; Ali Khan

doi:10.1016/j.gfj.2023.100916

Limits of arbitrage and their impact on market efficiency: Evidence from China

Jian Chen^*, Ahmad Haboub, Ali Khan

^*Corresponding author for this work

Accounting & Finance

Research output: Contribution to Journal › Article › peer-review

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.

Original language	English
Article number	100916
Number of pages	17
Journal	Global Finance Journal
Volume	59
Early online date	30 Nov 2023
DOIs	https://doi.org/10.1016/j.gfj.2023.100916
Publication status	Published - 11 Dec 2023

Data Access Statement

Data will be made available on request

Keywords

Limits of arbitrage
Market efficiency
Chinese stock market
Intraday return predictability
High-frequency trading

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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.",

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AU - Chen, Jian

AU - Haboub, Ahmad

AU - Khan, Ali

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N2 - 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.

AB - 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.

KW - Limits of arbitrage

KW - Market efficiency

KW - Chinese stock market

KW - Intraday return predictability

KW - High-frequency trading

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DO - 10.1016/j.gfj.2023.100916

M3 - Article

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VL - 59

JO - Global Finance Journal

JF - Global Finance Journal

M1 - 100916

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Limits of arbitrage and their impact on market efficiency: Evidence from China

Abstract

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Keywords

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