Does electronic trading influence stock prices? The Indian experience

ABSTRACT

We study the impact of electronic trading in India via two distinct approaches. First, in a more traditional way, we model the data generating process (DGP) of share price index for different trading regimes using an AR-GARCH filter. Our results indicate regime-invariant nature of the DGP. Subsequently, we employ rolling Hinich Bicorrelation test to AR-GARCH-filtered standardized residuals to examine the degree of efficiency of Indian share price index across trading regimes. Our results indicate a distinct improvement in informational efficiency of Indian share price index pursuant to adoption of electronic trading systems.

KEYWORDS:

• Electronic trading
• India
• stock prices
• nonlinearity

JEL CLASSIFICATION:

• G14
• C51

Acknowledgments

Insightful comments from an anonymous referee helped us greatly in revising the paper. We profusely thank the editor for his comments and for giving us an opportunity to revise the manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ AMH offers an intellectual gateway to examine market efficiency from an evolutionary perspective and in doing so, overcome the limitation of treating market efficiency as an all or nothing phenomenon. Further, AMH helps in uncovering the impact of different developments such as, but not limited to, financial liberalization, shift to electronic trading, and change in regulatory architecture on market efficiency (Lim 2009).

² The pre-whitening filters, based on Akaike Information criterion (AIC), were AR(20), AR(1) and AR(11) for OOR, ETR1 and ETR2 regimes, respectively.