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Relative Efficiency of Price Discovery on an Established New Market and the Main Board: Evidence from Korea

Relative Efficiency of Price Discovery on an Established New Market and the Main Board: Evidence... We examine the relative efficiency of price discovery between the new market (KOSDAQ) and the main board (KOSPI) in the Korean stock markets that have the same trading mechanism (i.e. electronic limit‐order book), focusing on the comparisons of each market’s efficiency of price discovery in three aspects: speed, degree, and accuracy. We find that, for our entire firm sample, price discovery on KOSDAQ is less efficient than on KOSPI. However, the price discovery of the most liquid group (top 40 stocks) on KOSDAQ turns out to be as efficient as the lowest group (top 160th–200th stocks) among the top 200 liquid stocks on KOSPI. These two quintiles are comparable in terms of their firm characteristics, so it appears that the greater overall efficiency of price discovery on KOSPI is due to the characteristics of its listed firms, rather than any inherent difference between a main board and a new market. We also find evidence that the speed of price discovery is mainly determined by turnover, whereas the accuracy of price discovery is mainly determined by turnover and intraday volatility. All together, our results provide some policy implications for developing or even developed countries eager to establish a viable new market. First, price discovery in a successful or viable new market in an emerging economy behaves as predicted in the market microstructure literature, even though that literature is based primarily on main boards in advanced stock markets. Second, price discovery in the most liquid group in a new market is more accurate, although slower, than in the lowest group among the liquid stocks on a main board; on balance, the main board and new market are comparable. Finally, the accuracy of price discovery is more (less) impacted by turnover (intraday volatility) on the new market than on the main board. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

Relative Efficiency of Price Discovery on an Established New Market and the Main Board: Evidence from Korea

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Publisher
Wiley
Copyright
© 2010 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/j.2041-6156.2010.01019.x
Publisher site
See Article on Publisher Site

Abstract

We examine the relative efficiency of price discovery between the new market (KOSDAQ) and the main board (KOSPI) in the Korean stock markets that have the same trading mechanism (i.e. electronic limit‐order book), focusing on the comparisons of each market’s efficiency of price discovery in three aspects: speed, degree, and accuracy. We find that, for our entire firm sample, price discovery on KOSDAQ is less efficient than on KOSPI. However, the price discovery of the most liquid group (top 40 stocks) on KOSDAQ turns out to be as efficient as the lowest group (top 160th–200th stocks) among the top 200 liquid stocks on KOSPI. These two quintiles are comparable in terms of their firm characteristics, so it appears that the greater overall efficiency of price discovery on KOSPI is due to the characteristics of its listed firms, rather than any inherent difference between a main board and a new market. We also find evidence that the speed of price discovery is mainly determined by turnover, whereas the accuracy of price discovery is mainly determined by turnover and intraday volatility. All together, our results provide some policy implications for developing or even developed countries eager to establish a viable new market. First, price discovery in a successful or viable new market in an emerging economy behaves as predicted in the market microstructure literature, even though that literature is based primarily on main boards in advanced stock markets. Second, price discovery in the most liquid group in a new market is more accurate, although slower, than in the lowest group among the liquid stocks on a main board; on balance, the main board and new market are comparable. Finally, the accuracy of price discovery is more (less) impacted by turnover (intraday volatility) on the new market than on the main board.

Journal

Asia-Pacific Journal of Financial StudiesWiley

Published: Aug 1, 2010

References