Testing Microstructure Theory on Karachi Stock Exchange
Abstract
We are analyzing the various measures of liquidity of Karachi Stock Exchange Market on the basis of microstructure theory. The concept of microstructure is focusing on the difference between the supply price and demand price of securities in any market. In other words, the price formation of the bid-ask spread is based on the supply and demand prices. Empirical studies conducted by different researchers have made a lot of contribution in this regards. As they concluded that bid-ask spread is constituted on the basis of different theories of liquidity. Historical background of microstructure literature shows that bid–ask spread constitutes the fundamental measure of the liquidity in any market. As a result of this it contributes to identify the best structure of stock market. There may be other admitted measures of liquidity. In the opinion of different researchers the internationally accepted measures of liquidity formation in any market include the Lambda, Turnover of the concerned security, Depth of that market, The Cost of Trip, Trade of security, etc. And they work as strong indicators of liquidity. Our study is a contribution to the literature as we try to explore those correlated variables that can be significantly and sequentially change. And they are serving a measure of the individual’s securities that are already traded in Karachi Stock Exchange Market. These admitted variables of our study are trading volumes of securities, number of transactions in the market, security return, volatility of securities prices, arrival of new information etc. we take a sample of 350 quoted securities in Karachi Stock Exchange Market, from 1990-2015. As far as result is concerned, depth showed a negative correlation with all spread measures in the Karachi Stock Exchange Market. But at the same time, perfect positive correlations are shown between spread measures in the analysis. It is a perfect proof of existence and validity of these liquidity measures in KSE. The results is evidencing that the arrival of new information, return on investment, volume of traded securities; are contributing a lot to explain significantly the sequential changes in KSE. At the same time various measures of the securities regarding liquidity are proving and confirming the previous researcher’s claim. In the end, analysts are in a better position to explain that the arrival of new information from different sources and different groups is functioning as a principal aspect for the variant contributories of liquidness of the Karachi Stock Exchange.
Downloads
References
Amihud, M. (1986). Liquidity and stock return. Financial Analysts Journal, (42), 43-48.
Amihud, M. (1989). The effects of beta, bid-ask spread, residual risk on stock returns. Financial Analysts Journal, (42), 479-486.
Ananth, M. (2000). Market Microstructure: A survey. Marshall School of business. University of southern California Los Angelos, CA 90089-1427, (213)-740 6519. Marsh 16, 2000.
Annaïch, G. (2001). Impact des transactions d’initiés sur la liquidité. Banque & Marchés, 53, 22-33. Juillet-Août 2001.
Bagehot (1971). The only game in town. Financial Analysts Journal, 27, 12-14.
Bellalah, M. & Simon, Y. (1999). Options, contrats à terme et gestion des risques. Collection Gestion, Economica, 14(15).
Black, K. (1971). Toward a fully automated stock exchange. Financial Analysts Journal, 27, 28-35.
Brennan, S. (1996). Market microstructure and asset pricing on the compensation for illiquidity in stock returns. Journal of financial economics, 41(6).
Chordia, R. & Subrahmanyam, L. (2000). Commonality in liquidity. Journal of financial economics, 56(2).
Clyman, J. (1998). Liquidity without volume. Journal of Futures Markets, (18), 281-296.
Copeland, G. (1983). Information effects on the bid-ask spread. Journal of Finance, 38, 1457-1469.
Demsetz, H. (1968). The cost of transacting. Quarterly Journal of Finance, 45, 33-53.
Frino, H. (2006). The impact of electronic trading on liquidity. Finance discipline, School of Business, University of Sydney, NSW, 2006.
Glosten, L. R. & Milgrom, P. (1985) Bid, ask, And Transaction Prices in a Specialist Market with Heterogeneously Informed Agents. Journal of Financial Economics, 14, 71-100.
Goldstein, K. & Kavajecz, L. (2000). Eighths, sixteenths and market depth: changes in tick size and liquidity provision on the NYSE. Journal of financial economics, 56, 125-149.
Huberman, G. & Halka, D. (2001). Systematic Liquidity. The journal of financial research, 24(2).
Harris, T. (1994). Minimum price variation, discrete bid-ask spread and quotation sizes. Review of Financial Studies, 7, 149-178.
Hasbrouck, J. (1993). Assessing the quality of the securities market: A new approach to transaction cost measurement. Review of financial studies, 6, 191-212.
Ho, S. (1981). Optimal dealer pricing under transactions and return uncertainty. Journal of Financial Economics, 9, 99-117.
Keynes, J. M. (1930). Treatise on money. Macmillan, London.
Khan, F., Muneer, S. & Anuar, M. A. (2013). Relationship between stock prices and economic variables: Sectoral analysis. Actual Problems of Economics, 143(5), 544-553
Kyle, A. (1985). Continuous Auctions and Insider Trading. Econometrica, 53, 1315-1335.
Mannaî, S. (1997). De la microstructure des marchés en général à la liquidité en particulier. Edition Economica.
Muneer, S., Butt, B. Z. & Rehman, K. U. (2011). A Multifactor Model of Banking Industry Stock Returns: An Emerging Market Perspective. Information Management and Business Review, 2(6), 267-275.
O’Hara, P. (1987). The microstructure of the market making. Journal of Financial and Quantitative Analysis, 21, 361-376.
Paul, I. & Benston, G. (2000). Liquidity Beyond the Inside Spread: Measuring and using information in the limit order book. Goizueto Business school, Emory University, Atlanta, GA, 30322. July,2000.
Robert, F. E. & Lange, J. (1997). Measuring, forecasting and explaining time varying liquidity in the stock market. University of California San Diego, May 1997.
Copyright (c) 2017 Information Management and Business Review
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of revised paper in the light of suggestions of the reviewers, the editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
