On the Static Efficiency of Secondary Bond Markets

31 Pages Posted: 30 Aug 2007 Last revised: 19 Jun 2008

See all articles by Lars Oxelheim

Lars Oxelheim

Research Institute of Industrial Economics (IFN); University of Agder; Lund University

Michael Rafferty

Western Sydney University - Department of Economics & Finance

Abstract

The major strand of finance literature understands market efficiency through the market's ability to process information into prices. Another strand of literature refers to the economists' usual sense of the word, i.e. that markets ensure that resources are allocated to their most profitable expected use, and provide services at the lowest cost. This paper, deploying the second definition, suggests a concept of static efficiency, and claims this can also be seen as a measure of market quality. The paper develops a measure of qualitative static efficiency for bond markets built on four indicators: transparency, number of maturities and issuers, spread, and liquidity. Indicators of market quality should be easily accessible, and permit international and inter-temporal comparison. Using Nordic markets as case studies, we show that these markets became more efficient during the 1990's, but that transparency of efficiency remains a problem. A number of measurement problems with the static efficiency indicators are discussed, as well as interdependence issues. The paper concludes with comments on future applications of the static efficiency measure.

Keywords: Efficiency, Transparency, Market Liquidity, Bond Markets

JEL Classification: D82, E44, G15, G18, G28, G38

Suggested Citation

Oxelheim, Lars and Rafferty, Michael, On the Static Efficiency of Secondary Bond Markets. Journal of Multinational Financial Management, Vol. 15, No. 2, 2005, Available at SSRN: https://ssrn.com/abstract=1010857

Lars Oxelheim (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
SE-10215 Stockholm
Sweden
+46 8 665 4527 (Phone)
+46 8 665 4599 (Fax)

University of Agder ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

Lund University ( email )

P.O.Box 7080
S-220 07 Lund
Sweden
+46462228744 (Phone)

Michael Rafferty

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

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