We study the dynamics of high-frequency market efficiency measures. We provide evidence that these measures comove across stocks and with each other, suggesting the existence of a systematic market efficiency component. In vector autoregressions, we show that shocks to funding liquidity (the TED spread), hedge fund assets under management, and a proxy for algorithmic trading are significantly associated with systematic market efficiency. Thus, stock market efficiency is prone to systematic fluctuations, and, consistent with recent theories, events and policies that impact funding liquidity can affect the aggregate degree of price efficiency. (JEL G10, G14)In a financial market relatively free of frictions and of high quality (i.e., an "efficient" market), prices accurately reflect fundamentals, and, in doing so, obey the law of one price, by which assets with identical cash flows sell for the same price. The finance profession has mostly treated market efficiency as a static concept. The seminal taxonomy in Fama (1970) of weak-, semi-, and strong-form efficiency inspires debate on which of these best describes financialWe thank Stefan Nagel (the editor), two anonymous referees,
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.