The informative role of trading volume in an expanding spot and futures market

How Effective are Stock Market Reforms in Emerging Market Economies? Evidence from a Panel VAR Model of the Indian Stock Market

“…Recapitulate that our sample period deliberately excludes the creation of the NSE and the associated move to screen-based trading which had significant impact on transactions cost at the Indian stock exchanges (Corwin and Schultz, 2012;OECD, 2007). Taken together, these results suggest that major changes such as transparency in pricing which reduces information cost and policies that reduce counterparty risk are perhaps much more relevant and important for the development of secondary equity markets that other reforms that may improve informational efficiency of the market and reduce volatility (e.g., Bhaumik et al, 2016), but which has limited impact on trading cost and trading volume.…”

“…The key measurement issue in the context of our empirical model involves a decision about the proxy for trading costs; trading volume is easily measured (Bhaumik et al, 2016). Based on the discussion in Aiyagari and Gertler (1991) and Keim and Madhavan (1997), we argue that the bid-ask (or buy-sell) spread is perhaps the single most important component of trading costs.…”

“…Hence, while the older literature on the Indian stock market used data from the BSE (Berkman and Elewarapu, 1998), more recent literature has used data from the NSE as well (Bhaumik et al, 2016).…”

“…Some scholars have attempted to trace the timeline of stock market development in emerging market economies (Bekaert et al, 2003), while others have focused on the institutional and other determinants of stock market development in emerging market contexts (Billmeier and Massa, 2009). A number of scholars have examined the impact of capital market reforms in general (Bekaert and Harvey, 1997;Bekaert et al, 2001), as well as the impact of specific types of reforms such as opening up to international capital flows (Levine and Zevros, 1998;Kim and Singhal, 2000;Henry 2000), creation of more transparent trading platforms (Corwin and Schultz, 2012), and introduction of trading in financial derivatives (Bhaumik, Karanasos and Kartsaklas, 2016), on observable market characteristics such as bidask spreads, volume/liquidity, returns and volatility. 1 The growing literature on stock market development in emerging market economies, however, does not adequately address two important issues.…”

“…In effect, therefore, we have a panel VAR model, which we estimate using a system GMM approach. We estimate the model in the context of India, an emerging market economy that has adopted a number of measures aimed at stock market development since the early 1990s (Bajpai, 2006;Bhaumik et al, 2016). In particular, we focus on the reforms that were introduced after the creation of the NSE and screen-based trading that have been much discussed in the literature.…”