The Impact of Market Conditions and Structures on the Quality and Pricing Efficiency of Securities Markets

Abstract

This dissertation contains four essays that each examines a separate issue related to the efficiency, structure and quality of securities markets. The first essay examines the relation between information asymmetry and the cost of equity capital of ASX listed firms. Controlling for factors generally known to influence the required return on equity, this study documents a significant and positive relation between information asymmetry and investor’s required rate of return. The second essay examines liquidity in the Chinese stock market around the introduction of the CSI 300 Index Futures contract. This study finds that liquidity of the CSI 300 stocks decreases after the introduction of the Index Futures. The results are robust after controlling for commonality in liquidity. It also finds an increase in conditional volatility under the GARCH (1, 1) framework, following the index futures introduction. The third essay examines the efficiency of the Treasury bond futures market in Australia. It provides a comprehensive explanation of the unique method used to price Australian Treasury Bond Futures. Results indicate that the futures contracts exhibit minimal variation from their theoretical value. However, during periods of market stress, the bond futures contracts exhibit greater mispricing. The results show a decreasing pattern of mispricing towards expiry. The fourth essay investigates the determinants of liquidity and fill rate in the ASX operated Centre Point dark pool. The results show that the level of trading activity in the dark pool is higher for larger stocks with lower prices. The dark pool’s share of total volume is higher when quoted spread is larger, when best depth is thicker, and when order imbalance, volatility and adverse selection are lower. Fill rate of Centre Point orders is higher when dark pool trading is most active. There is no evidence of dark pool trading being detrimental to market quality on the main exchange.