Which of the following best characterizes the effect of liberalization on market micro-structure in emerging markets? Liquidity a) Increases and bid-ask spreads increase b) Increases and bid-ask spreads decrease c) Decreases and bid-ask spreads increase
Oh noes! Answer is A. “The effect of liberalization is to increase liquidity and volume. However, bid-ask spreads increase possibly because new, less experienced foreign investors are being exploited by the local dealers.” And I don’t see any mention of the effect of liberalization on bid-ask spreads in the CFAI or Schweser curriculum. Schweser, what are you smoking?
whateva i bet CFA would say B not A
I’ve been through this question myself and if I remember schweser state it is A because even though the market is liberalised it is not necessarily integrated which still allows for information asymmetry which allows dealers to take advantage of foreign investors. correct me if I’m wrong
A bid/ask spreads get gamed by locals that is right from the texts. “Information Asymmetry.”
I agree with Kwonyboy.
This is one of the reasons I am staying clear of all these third party question banks. Yes dealers may want to skin foreign investors but it goes against the grain of using bid-ask spread as a measure of liquidity that is sprinkled all over the curriculum.
Although this is from a question provider, it is also a direct quote from the texts.