14 analysis and neural networks to measure efficiency in the Italian banking industry). However, the data required for this type of analysis are available only for a sub-set of countries.

For financial markets, efficiency measures focus less on directly measuring the cost of transactions and more on measuring transactions. A basic measure of efficiency in the stock market is the turnover ratio, i.e. the ratio of turnover to capitalization in the stock market. The logic of using this variable is that the higher the turnover (the more liquidity), the more efficient the market. In the bond market, the most commonly used variable is the tightness of the bid-ask spread (with the U.S. and Western European markets showing low spreads, and Vietnam, Peru, Qatar, Dominican Republic, and Pakistan reporting high spreads) and the turnover ratio (although the measurement of the latter often suffers from incomplete data).

A range of other proxies for efficiency in financial markets has been used in empirical literature (Table 1). One of them is price synchronicity, calculated as a degree of co-movement of individual stock returns in an equity market. The variable aims to capture the information content of daily stock prices, as a market operates efficiently only when prices are informative about the performance of individual firms. Another proxy variable for efficiency is private information trading, defined as the percentage of firms with trading patterns that arise from trading conducted through privately obtained information. This calculation is based on the examination of daily price-volume patterns, and helps indicate the prevalence of trading in a stock based on private or privileged information. Finally, efficiency can be approximated by the real transaction cost. Based on daily return data of the listed stocks, this variable attempts to approximate the transaction costs associated with trading a particular security. This variable helps determine the barriers to efficiency in the market. All these indicators are constructed by compiling and statistically processing firm-level data from a variety of market sources.

# _3.4. Financial Stability_

Last, but not the least, financial stability is an important feature of the financial sector. There is a vast literature specifically on measuring systemic risk, stress tests, and other tools for financial stability. Because of the importance of financial stability for broader macroeconomic stability, the topic is sometimes treated as a separate one.<sup>6</sup> But financial stability is a part of the broader financial development process. To illustrate this, imagine a country where banks‘ lending standards become very loose, with banks providing loans left and right, without proper risk management and loan monitoring. On the surface, one could observe the rapid growth as a sign of deepening and increased access to finance. Also on surface, the financial sector can seem efficient, for some period of time: without the loan approval process, such banks would be able

> 6 For example, many central banks around the world publish reports focused almost exclusively on financial stability. Similarly, the IMF‘s _Global Financial Stability Report_ has a clear stability focus. There are, however, many complementarities between financial stability, depth, access, and efficiency, as emphasized for instance in the World Bank-IMF‘s Financial Sector Assessment Program.