Does market microstructure affect time-varying efficiency? Evidence from emerging markets

This study advances beyond the conventional singular factor analysis and considers multiple market microstructure components to investigate time varying informational efficiency. This holistic approach deepens the comprehension of the intricate interplay among diverse microstructure facets. This study employs the System Generalized Method of Moments (SGMM) model to mitigate potential endogeneity pitfalls. The dataset comprises firm-level data from five emerging markets, for the period 2001-2020. After controlling for a battery of macroeconomic factors and idiosyncratic risk, this study finds that liquidity, volatility, thin trading, and trading cost are the key determinants of time varying efficiency. In comparison anonymous trading, tick size, and automation are not found to have a significant influence. The results are robust for an alternative choice of sample periods and alternative estimation methods. Individual and institutional investors should consider market microstructure components while designing asset allocation strategies.