Scandinavian Working Papers in Business Administration

Working Paper Series,
Lund University, Institute of Economic Research

No 2001/7: On the Static Efficiency of Secondary Bond Markets

Lars Oxelheim () and Michael Rafferty ()
Additional contact information
Lars Oxelheim: Department of Business Administration, School of Economics and Management, Lund University, Postal: Department of Business Administration, School of Economics and Management, Lund University, Box 7080, SE-220 07 Lund, Sweden
Michael Rafferty: University of Western Sydney, Postal: School of Economics and Finance, Locked Bag 1797 Penrith South, 1797 NSW, Australia

Abstract: Efficiency in the context of financial markets can be defined in many ways. The major strand of finance literature measures 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 use, and provide services at the lowest cost in terms of the resources employed. This paper, deploying the second definition, suggests a concept of static efficiency and claims that this efficiency can also be seen as a measure of the quality of a market. 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 by those that are intending to use it. Using Nordic markets as case studies, we show that these markets became more economically efficient during the 1990's, but that transparency of efficiency remains a problem.

Keywords: Key words: efficiency; transparency; market liquidity; bond markets.

22 pages, February 22, 2002

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