Market Efficiency and Liquidity

Dominik Rosch

Research output: Types of ThesisDoctoral ThesisInternal

Abstract

The main theme of this thesis is to investigate the interaction between market efficiency and liquidity. In particular to document time- and cross-sectional variation in market efficiency, and whether individual stock efficiency co-moves with aggregate market efficiency; to investigate why inefficiencies arise and how trading against these inefficiencies affects market liquidity. Theory predicts that arbitrage improves financial market liquidity when arbitrage opportunities arise as a result of temporary demand shocks and worsens liquidity when arbitrage opportunities arise as a result of differences in information. My analysis suggests that around 70% of the arbitrage opportunities arise as a result of demand shocks. Consistent with theory, I then show that an increase in arbitrage activity is associated with a reduction in market order imbalance and an improvement in liquidity.
Original languageEnglish
Awarding Institution
  • Erasmus University Rotterdam
Supervisors/Advisors
  • van Dijk, Mathijs, Supervisor
  • Bongaerts, Dion, Doctoral committee member
  • Driessen, Doctoral committee member
  • Menkveld, Doctoral committee member
Award date18 Dec 2015
Place of PublicationRotterdam
Print ISBNs9789058924254
Publication statusPublished - 18 Dec 2015

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