Market efficiency and liquidity in financial market during crises

Abstract

In this thesis, we examine the relationship between market efficiency and market liquidity, focusing on financial markets during crises. Our work draws upon the article Liquidity and market efficiency (Chordia et al., 2008), and investigates the connection between market efficiency and liquidity in crisis periods. The research is based on analyses of ETFs (Exchange Traded Fund) in G7 countries and Norway, exploring the effects of crises on efficiency and liquidity in various time frames. The analyses utilize historical ETF prices from 2015 to 2022. We conduct multiple analyses using Microsoft Excel and RStudio 2022.02.0 to process the data. The analysis identifies a correlation between market efficiency and liquidity, a correlation that often intensifies during crisis periods. The findings illustrate that while financial crises aren't the exclusive determinants of this correlation, they certainly contribute significantly to the overall scenario. The findings of this study have substantial implications for investors, shedding light on the behavior of the financial market during crises. Moreover, this thesis examines a current and crucial topic that explores the impact of global crises on financial markets. Understanding this relationship is of valuable importance for investors, decision-makers, and the broader economy. The analysis reveals a crucial explanatory factor, highlighting the relationship between market efficiency and liquidity, which significantly influences the functioning of the financial market.