Efficiency of stock exchanges: A comparative approach

In every modern economy the stock exchange has a dual role; on the one hand it provided firms with the opportunity to be listed and to obtain funds for their growth, on the other hand allows investors to invest in a variety of financial products, to generate returns associated with their level of risk aversion.

In this context, a global competition has started among the main stock exchanges, in order to attract firms and investors, and implicitly make that respective stock exchange the dominant one in the global securities market. Thus, the objective of this study is to investigate the attractiveness of the 25 world largest stock exchanges, ranked by capitalization, between 2007 to 2011, from two opposite positions: from the investors’ side and firms’ side. In addition, the study examines the extent to which these positions have been affected by the global financial and economic crisis.

Our methodology is a non-parametric approach, based on the Data Envelopment Analysis (DEA). Thus, we employ two different DEA models to estimate the efficiency of the stock exchanges in our sample in attracting on the one hand firms who desire to be listed and on the other hand investors who desire to provide funds. The basic hunch is that the higher the estimated efficiency, the more attractive is a given stock exchange for firms and investors. The results from the two DEA models are used to build a competition matrix that will highlight the place that a stock exchange occupies in the global setting compared to its competitors, regarding the ability to attract firms and investors. By building such a matrix for each year from 2007 to 2011, we are able to underline the changes that have occurred in a stock exchange due to the global financial and economic crisis.

The data are obtained from the statistical database of the World Federation of Exchange and the World Economic Forum the Global Competitiveness Report.

The results further provide the managerial authorities of a stock exchange with an opportunity to better identify the position of the stock exchange in the global landscape. Additionally, the implications of the results supply policy makers to put proper policies in place that could improve the attractiveness of stock exchanges.