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Cross-sectional variation of market efficiency

Jing Jiang (Department of Economics and Finance, Sacred Heart University, Fairfield, Connecticut, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 13 February 2017




This paper aims to provide evidence that market efficiency varies greatly across individual stock, and across market exchanges.


Three approaches, partial adjustment model, Dimson beta model and variance ratio test, are used on a large sample of US stocks.


This paper finds prices are closer to random walk benchmarks (i.e. more efficient) for stocks with better liquidity provision, frequent trading, greater return volatility, higher prices, larger market capitalizations and smaller trade sizes. These findings suggest that liquidity stimulates arbitrage activity, which, in turn, enhances market efficiency. Market efficiency also varies with information environment. The results show that stocks with greater information-based trading exhibit higher level of efficiency. Finally, market structure influences market efficiency. New York Stock Exchange stocks achieve higher level of efficiency than NASDAQ stocks do. The empirical results are robust and not driven by differences in stock attributes between the two markets.

Research limitations/implications

Overall, these results indicate that liquidity provision, stock attributes and market structure exert a significant impact on the realization of market efficiency.

Practical implications

In addition, this paper is also relevant to both stock exchanges facing increased competition and to market regulators.


Prior studies offer little evidence on the speed at which new information is impounded into the price. There is also limited evidence regarding how liquidity provision and market structure affect market efficiency. Using a transformation of the speed of price adjustment and other measurements as proxies for individual stock efficiency, this study may shed further lights on our understanding of market efficiency.



The author thanks Kee Chung, Kenneth Kim, Carl Hsin-han Shen, Hao Zhang and seminar participants at the University at Buffalo and Sacred Heart University for valuable comments and discussions. The author is responsible for the content.


Jiang, J. (2017), "Cross-sectional variation of market efficiency", Review of Accounting and Finance, Vol. 16 No. 1, pp. 67-85.



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