Are Asian exchanges outliers? A market quality criterion

• Published in: Investment management & financial innovations 2021, Vol.18 (2), p.64-78
• Main Authors: R. Chakravarty, Ranjan, Pani, Sudhanshu
• Format: Article
• Language: English
• Subjects: Asset allocation; Conflicts of interest; country risk; Diversification; Emerging markets; Equity; GDP; global asset allocation; Gross Domestic Product; international diversification; International finance; Investment advisors; Investors; Liquidity; market microstructure; market quality of stock exchanges; Political risk; Portfolio investments; Return on equity; Stock exchanges; trading venues; Volatility
• ISSN: 1810-4967; 1812-9358
• DOI: 10.21511/imfi.18(2).2021.06

This paper provides a practical, empirical and theoretical framework that allows investment managers to evaluate stock exchanges’ market quality when choosing among different plausible international trading venues. To compare trading exchanges, it extends the hypothesis of market microstructure invariance to trading across exchanges. A measure ω, the ratio of the market-wide volatility to microstructure invariance, is introduced. The paper computes ω for the exchanges around the world. Its value for the NSE (India) is 24.5%, the Korea Exchange (Korea) is 7.9%, the Shanghai Exchange (China) is 3.5%, and the Shenzhen Exchange (China) is 4.4%, which is significantly different from that of major exchanges in the USA (NYSE – 0.8%, NASDAQ – 1.3%) and Europe (LSE (UK) – 0.4). This country risk dimension clearly identifies which equity exchanges cannot hold their own direct correlational hedges and therefore mandatorily require derivative positions, and has significant implications for the decision making of global long-short equity asset allocators in the Asian listed equity markets.