Innovations in financial markets and their impacts on market quality
- Publication Type:
- Thesis
- Issue Date:
- 2021
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This thesis comprises three studies of recent issues in financial markets: the declining number of US listed stocks, the growth of exchange-traded funds (ETFs), and their impacts on market quality. The first study finds that particular secondary market structure changes are not responsible for the declining number of listed stocks, contrary to conjectures voiced by policymakers. Liquidity has improved for firms in all size groups since the market microstructure changes, and increasing the tick size, as proposed by US policymakers, is unlikely to stimulate increased public listing of companies. The second study finds that the growth of ETFs diminishes the profitability of a broad set of asset pricing anomalies, which is consistent with increasing informational efficiency. Much of this effect occurs because ETFs’ stock-lending activities reduce short-selling constraints and thereby allow for more efficient incorporation of information, reducing mispricing. The third study shows that ETF portfolio rebalancing events do not result in significant distortions of stock prices. However, unexpected investments flowing into and out of ETFs cause temporary price distortions in the underlying stocks held by the ETFs. Overall, this thesis contributes to academic and industry understandings of recent financial market developments.
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