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

Chen, Jian; Haboub, Ahmad; Khan, Ali

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.

Citation

Chen, J., Haboub, A., & Khan, A. (2024). Limits of arbitrage and their impact on market efficiency: Evidence from China. Global Finance Journal, 59, Article 100916. https://doi.org/10.1016/j.gfj.2023.100916

• Journal Article Type: Article
• Acceptance Date: Nov 22, 2023
• Online Publication Date: Nov 30, 2023
• Publication Date: 2024-03
• Deposit Date: Aug 7, 2024
• Publicly Available Date: Aug 22, 2024
• Journal: Global Finance Journal
• Print ISSN: 1044-0283
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 59
• Article Number: 100916
• DOI: https://doi.org/10.1016/j.gfj.2023.100916
• Keywords: Limits of arbitrage, Market efficiency, Chinese stock market, Intraday return predictability, And high-frequency trading
• Public URL: https://nottingham-repository.worktribe.com/output/38111647
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1044028323001114?via%3Dihub