Transaction costs and market efficiency: Evidence from commission deregulation

This study analyzes the impacts of explicit transaction costs on weak-form market efficiency within the context of the brokerage commission deregulation in Japan in October 1999, which led to lower commission rates across the market. Applying two alternative statistical tests to both daily and weekly data, we find that return randomness (unpredictability) increases significantly for stocks listed in Japan, but not for the Japanese stocks dually listed in the United States, which are immune to the deregulation. These results suggest an inefficiency loss or an efficiency gain in the Japanese equity market following the deregulation, insofar as randomness proxies for efficiency.