demand curves for stocks do slope down new evidence from an index weights adjustment weights in the toronto stock exchange 300 index are determined by the market values of the included stocks public floats in november 1996 the exchange implemented a previously announced revision of its definition of the public float this revision which increased the floats and the index weights of 31 stocks conveyed no information and had no effect on the legal duties of shareholders affected stocks experienced statistically significant excess returns of 2 3 percent during the event week and no price reversal occurred as trading volume returned to normal levels these findings support downward sloping demand curves for stocks an obvious event with which to examine the slope of demand curves for stocks is one that changes supply in the absence of new information a shift in supply should not affect stock prices if demand curves for stocks are flat scholes 1972 using a sample of secondary equity distributions asks whether stocks are unique works of art or merely abstract claims to residual cash flows with many close substitutes as is assumed in much of finance theory scholes finds that the negative price impact of secondary offerings depends on the seller s identity implying the revelation of unfavorable informationand rules out a pure supply effect mikkelson and partch 1985 also using a sample of registered and unregistered secondary offerings find weak evidence of downward sloping demand curves but are unable to cleanly distinguish this explanation from the alternative explanation based on unfavorable information a different class of events additions to widely followed stock market indexes ostensibly provides a setting where information effects should not be present shleifer 1986 documents a permanent price increase for stocks

testing deterrence theory rigor makes a difference there is no consensus among scholars on how to test hypotheses about deterrence systematically the disputes are sometimes rooted in differences about theory or sources of data but they are magnified by methodological confusion especially over concepts and operational definitions that produce perverse empirical results serious theoretical errors include inadequate appreciation of the role of uncertainty in deterrence as well as selection biases that undermine empirical tests rigorous examination of our previous work in light of recent criticism discloses very robust findings on the conditions for deterrence success and failure

global versus local asset pricing a new test of market integration should capital cost calculations be based on a global or local market benchmark the december 2000 redefinition of the morgan stanley capital international msci global equity index was a natural experiment addressing this question it is argued that this event triggered a portfolio shift by index funds large enough to affect the residual asset supplies constituting the global and local market benchmarks of all actively managed capital changes in the market benchmarks imply distinct and predictable changes to global and local stock betas exploring whether global or local beta changes best explain the cross section of event returns reveals that stocks in developed markets are priced globally and not locally jel g11 g14 g15

agency and brokerage of real assets in competitive equilibrium brokerage contracts for many categories of real assets are characterized by a common constant commission rate payable upon sale exclusive agency and contractual asking prices for a large market in steady state these conventional contracts produce in equilibrium no agency problem between a broker and his clients each broker spends the same time or effort selling each client s asset as the broker would spend on his own assets as in standard agency problems extra effort by a broker generates first order stochastically dominant distributions of bids by potential buyers unlike standard agency problems each broker can allocate his time or effort between selling the assets of his multiple clients and searching for new clients in competition with other brokers because brokers time spent searching for new sellers is dissipative entry by brokers is excessive in equilibrium article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

do stock investors value corporate sustainability evidence from an event study this paper analyzes the impacts of index inclusions and exclusions on corporate sustainable firms by studying a sample of us stocks that are added to or deleted from the dow jones sustainability world index over the period 2002 2008 the impacts are measured in terms of stock return risk and liquidity we cannot find any strong evidence that announcement per se has any significant impact on stock return and risk however on the day of change index inclusion exclusion stocks experience a significant but temporary increase decrease in stock return liquidity deteriorates after the announcement day and bounces back significantly near the day of change systematic risk shows little change after announce ments but idiosyncratic risk is higher after announcements the overall results support harris and eitan s the journal of finance41 4 815 829 1986 price pressure hypothesis which posits that event announcement does not carry information and any shift in demand and hence the corresponding price change and liquidity change is temporary

direct tests of the reservation wage property this paper provides the first direct experimental tests of the reservation wages predicted by finite horizon job search models previous indirect tests were based on search duration and search income the authors show that such indirect tests are weak by demonstrating that a naive rule performs essentially as well as the risk neutral model in predicting search duration in contrast direct tests of predicted reservation wages imply rejections of both the naive rule and the risk neutral model the general concave model survives direct tests with reservation wage data as does a specific logistic concave model copyright 1992 by royal economic society

experiments on unemployment benefit sanctions and job search behavior this paper presents the results of an experimental study on unemployment benefit sanctions the experimental set up allows us to distinguish between the effect of benefit sanctions once they are imposed the ex post effect and the threat of getting a benefit sanction imposed the ex ante effect we find that both effects matter moreover the ex ante effect turns out to be substantial and bigger than the ex post effect benefits sanctions stimulate the outflow from unemployment

search at wholesale auto auctions wholesale trade in used cars is conducted by ascending bid auctions with sale subject to the seller s acceptance of the winning bid one out of three times the seller rejects the bid and no trade takes place i model the seller s decision as the outcome of search and thus determined by the winning bid distribution and a reported retail price this market is ideal for testing search theory since all offers whether or not accepted are observed qualitative predictions of the theory in particular the role of the variance are confirmed the quantitative results are more ambiguous

platform intermediation in a market for differentiated products we study a two sided market where a platform attracts firms selling differentiated products and buyers interested in those products in the subgame perfect equilibrium of the game the platform fully internalises the network externalities present in the market and firms and consumers all participate in the platform with probability one the monopolist intermediary extracts all the economic rents generated in the market except when firms and consumers can trade outside the platform in which case consumers obtain a rent that corresponds to the utility they would get if they did trade outside the platform the market allocation is constraint efficient in the sense that the monopoly platform does not introduce distortions over and above those arising from the market power of the differentiated product sellers an increase in the number of retailers increases the amount of variety in the platform but at the same time increases competition as a result the platform lowers the firm fees and raises the consumer charges in contrast an increase in the extent of product differentiation raises the value of the platform for the consumers but weakens competition in this case the platform raises both the charge to the consumers and the fee for the firms

general deterrence between enduring rivals testing three competing models general deterrence unlike immediate deterrence has rarely been analyzed in a systematic comparative manner we outline a research design for doing so by studying the circumstances under which in a set of enduring rivalries challengers are likely to initiate militarized disputes we indicate the conceptual and operational steps necessary to make and empirically compare predictions stemming from three often competing theoretical frameworks rational deterrence a general model of rational conflict initiation and a cognitive psychological model of behavior emphasizing risk orientation and misperception the results of probit analysis on a pooled time series of enduring rivalries since 1945 provide support for hypotheses from each of the different theoretical models

strategic interaction and the statistical analysis of international conflict although strategic interaction is at the heart of most international relations theory it has largely been missing from much empirical analysis in the field typical applications of logit and probit to theories of international conflict generally do not capture the structure of the strategic interdependence implied by those theories i demonstrate how to derive statistical discrete choice models of international conflict that directly incorporate the theorized strategic interaction i show this for a simple crisis interaction model and then use monte carlo analysis to show that logit provides estimates with incorrect substantive interpretations as well as fitted values that can be far from the true values finally i reanalyze a well known game theoretic model of war bueno de mesquita and lalman s 1992 international interaction game my results indicate that there is at best modest empirical support for their model

regression discontinuity and the price effects of stock market indexing the russell 1000 and 2000 stock indexes comprise the first 1000 and next 2000 largest firms ranked by market capitalization small changes in the capitalizations of firms ranked near 1000 move them between these indexes because the indexes are value weighted more money tracks the largest stocks in the russell 2000 than the smallest in the russell 1000 using this discontinuity we find that additions to the russell 2000 result in price increases and deletions result in price declines we then identify time trends in indexing effects and the types of funds that provide liquidity to indexers

chicken and egg competition among intermediation service providers we analyze a model of imperfect price competition between intermediation service providers we insist on features that are relevant for informational intermediation via the internet the presence of indirect network externalities the possibility of using the nonexclusive services of several intermediaries and the widespread practice of price discrimination based on users identity and on usage efficient market structures emerge in equilibrium as well as some specific form of inefficient structures intermediaries have incentives to propose non exclusive services as this moderates competition and allows them to exert market power we analyze in detail the pricing and business strategies followed by intermediation services providers copyright 2003 by the rand corporation

turnover externalities with marketplace trading this article considers equilibrium decentralized trade when there is a marketplace where buyers and sellers meet costlessly since buyers have idiosyncratic match payoffs for each seller s good some buyers rather than trade with the current stock of sellers wait for new sellers to enter the marketplace to obtain a good they like a turnover externality exists where all traders are better off with higher entry rates of new traders furthermore this turnover externality supports multiple pareto rankable equilibria this provides new insights into similar results obtained in the random matching literature

what makes deterrence work cases from 1900 to 1980 the use of military force to achieve foreign policy objectives is an enduring feature of international politics force or the threat of force may be used either to change the status quo or to maintain it threatening the use of force to maintain the status quo often takes the form of deterrence defined by patrick morgan as the threat to use force in response as a way of preventing the first use of force by someone else 1 deterrence sometimes succeeds and sometimes fails failures are attested to by numerous international wars of history in the nuclear age a failure could cost us our lives the conditions of successful deterrence thus require thorough logical and empirical analysis

credibility uncertainty and deterrence in this paper the connection between deterrence stability and threat credibility is examined conceptually and theoretically we formulate as a model of bilateral deterrence a game of incomplete information in which each player is uncertain about its opponent s preferences should it unilaterally alter the status quo uncertainty about the preferences of one s opponent leads to uncertainty about the opponent s willingness to retaliate by identifying the credibility of each player s retaliatory threat with the probability that a player prefers retaliation to capitulation we maintain consistency with both the traditional strategic literature where credibility usually means believability and with game theory where credibility is usually synonymous with sequential rationality i e subgame perfect equilibrium we analyze formally the strategic implications of this conception of credibility and thus explore the critical role played by uncertainty in deterrence by explicitly modeling uncertainty we are able to understand the role of threats in contributing to or detracting from the robustness of a deterrence relationship

asymmetric information and intermediation chains we propose a parsimonious model of bilateral trade under asymmetric information to shed light on the prevalence of intermediation chains that stand between buyers and sellers in many decentralized markets our model features a classic problem in economics where an agent uses his market power to inefficiently screen a privately informed counterparty paradoxically involving moderately informed intermediaries also endowed with market power can improve trade efficiency long intermediation chains in which each trader s information set is similar to those of his direct counterparties limit traders incentives to post prices that reduce trade volume and jeopardize gains to trade

the employment effect of reforming a public employment agency by how much does an increase in operating effectiveness of a public employment agency pea and a reduction of unemployment benefits reduce unemployment using a recent labour market reform in germany as background we find that an enhanced effectiveness of the pea explains about 20 of the observed post reform unemployment decline the role of unemployment benefit reduction explains just about 5 of the observed decline due to disincentive effects resulting from the reform the reform of the pea could have had an even higher impact on unemployment reduction if there had been less focus on long term unemployed workers

fishing in different pools job search strategies and job finding success in canada in the early 1980s this article examines the job search methods of jobless workers and emphasizes sample selectivity in choice of job search strategies especially use of public employment agencies longitudinal data from the labour force survey of canada for 1981 1983 and 1986 indicate that job search methods change with the business cycle and that many people find jobs without any reported search the determinants of job search success also vary substantially over the business cycle implying a substantial social return to public employment agencies at the 1983 trough of the recession but no noticeable benefits when aggregate unemployment is relatively low

military coercion in interstate crises in an international crisis states make demands backed by threats to use force although these threats can be explicit in diplomatic communications they will not generally carry much weight unless substantiated by some show of force military measures designed to convey the commitment to resort to arms if one s demands are not satisfactorily met to have an impact this commitment must be credible it must be in one s interest to carry out the threat if the opponent refuses to comply in an environment where states possess private information about their valuations capabilities or costs credibility can be established by actions that a state unwilling to fight would not want or would not dare to take military moves such as arms buildups troop mobilizations and deployments to the potential zone of operations can alter incentives in a crisis by changing one s expected payoff from the use of force these are tacit bargaining moves that can restructure the strategic context thereby creating and possibly signaling one s commitments while undermining those of the opponent how can states use the military instrument to establish commitments and how does the nature of the instrument affect their ability to communicate them credibly to their adversaries there are two distinct mechanisms for credible signaling in economic models information can be transmitted reliably by sinking costs actors burn money to reveal that they value the disputed issue even more in contrast theories of interstate crisis bargaining usually rely on choices that increase the difference between backing down and fighting actors tie their hands by running higher risks of war to reveal their resolve the first mechanism involves costs that actors pay regardless of outcome and the second involves costs that actors pay only if they fail to carry out some threat or promise

buyers sellers and middlemen variations on search theoretic themes we study exchange that is bilateral but indirect it involves chains of intermediaries or middlemen in markets with frictions these frictions include search and bargaining problems we show how and how many intermediaries might get involved in a chain and how bargaining with one depends on upcoming negotiations with those downstream the roles of buyers sellers money and prices are discussed allowing us to clarify some neglected connections between different branches of search theory pursuing one such connection with monetary economics we show how bubbles can emerge in intermediation even with fully rational agents and perfect foresight

uncertainty and shopping behaviour an experimental analysis this paper reports experimental tests of three search equilibrium models these models which differ only in the search strategies available to the buyers have qualitatively different predictions that is equilibria price distributions single price equilibria at the competitive price and at the monopoly price and two price equilibria the experimental outcomes generally were consistent with the models predictions this suggests that debate on the utility of this class of models should shift to the realism of the models assumptions rather than focus on their ability to characterize market outcomes also since the basic models have been validated the project of analyzing experimentally the results of relaxing some of their assumptions seems worthwhile

can brokerage have an equilibrium selection role abstract this paper presents a model of housing markets with multiple search equilibria there are two problems associated with multiplicity of equilibria one is that the economy may end up at a pareto inferior equilibrium and the other is that it becomes more difficult to predict the effect of policy measures the objective of this study is to examine whether the brokerage institution can resolve these problems it is shown that brokerage can reduce the number of equilibria and can also improve welfare by moving the economy to a pareto superior equilibrium however under certain conditions brokerage reduces welfare and creates additional coordination problems by increasing the number of equilibria

the role of intermediaries in enhancing market efficiency in the ethiopian grain market this paper investigates the impact of the institution of brokerage on the optimal search behaviour and the welfare gains and losses of traders in the ethiopian grain market without brokers the privately optimal search diverges from the socially optimal search due to the positive spill over of individual search behaviour numerical analysis using the actual distribution of search costs and search efficiency obtained from primary data collected in ethiopia reveals that this externality is partially internalised by the presence of brokers and that total welfare increases significantly due to a more efficient allocation of search effort

big fish in small ponds the trading behavior and price impact of foreign investors in asian emerging equity markets this paper analyzes a new dataset for the aggregate daily trading of all foreign investors in six asian emerging equity markets and provides two new findings first foreigners flows into several markets show positive feedback trading with respect to global as well as domestic equity returns the nature of this trading suggests it is due to behavioral factors or foreigners extracting information from recent returns rather than portfolio rebalancing effects second the price impacts associated with foreigners trading are much larger than earlier estimates the results suggest that foreign investors and external conditions have a larger impact on emerging markets than implied by previous work

an anatomy of the s p game the effects of changing the rules this study analyzes the effects of changes in s p 500 index composition from january 1986 through june 1994 a period during which standard and poor s began its practice of preannouncing changes five days beforehand the new announcement practice has given rise to the s p game and has altered the way stock prices react we find that prices increase abnormally from the close on the announcement day to the close on the effective day the overall increase is greater than under the old announcement policy although part of the increase reverses after the stock is included in the index the s p game is based upon the perceived price reaction of a stock to news that it will be added to the s p 500 the game involves buying the shares of the stock ahead of s p 500 funds and then selling after index fund demand is satisfied the opportunity to play the s p game arose in october 1989 when standard and poor s p began its practice of preannouncing changes to the s p 500 before that time s p announced the change in composition after the close of trading with the change becoming effective by the following morning s open with no lead time index funds bought the shares of the newly included stock on the day following the announcement the buying pressure caused prices to rise for additions during the period 1976 through 1983 for example shleifer 1986 found an abnormal price increase of 2 79 percent on the day following the announcement using roughly the same sample period harris and gurel 1986 reported a 3 13 percent average increase

delay in trade networks we study decentralized markets involving producers and consumers that are facilitated by middlemen we do this by analyzing a noncooperative networked bargaining game we assume a complete information setup wherein all the agents know the structure of the network the values of the consumers and the transaction costs involved but allow for some search friction when either producers or consumers trade with middlemen in such a setting we show that sunk cost problems and a heterogeneous network can give rise to delay or failure in negotiation and therefore reduce the total trade capacity of the network in the limiting regime of extremely patient agents we provide a sharp characterization of the trade pattern and the segmentation of these markets

the escalation of great power militarized disputes testing rational deterrence theory and structural realism realism we test the relative explanatory power of these two theoretical approaches on the escalation of deterrence encounters among great powers from 1816 to 1984 we derive a set of hypotheses from each model operationalize them for systematic empirical analysis and test the hypotheses on 97 cases of great power deterrence encounters by means of probit analysis the results are that the hypotheses derived from deterrence theory receive considerable support whereas none of the hypotheses derived from structural realism are supported in contemporary research on the causes of international conflict the realist paradigm has been the dominant theoretical approach within this broad framework however scholars have developed at least two prominent alternative models of the conditions under which conflict is likely to arise the first approach structural realism 1 focuses on the attributes of the international system while the second deterrence theory is largely dyadic and emphasizes the resolve and relative military capabilities of adversarial states while both theoretical approaches attempt to identify the conditions under which international crises and wars are likely to arise their

the effect on stock price of inclusion in or exclusion from the s p 500 1987 the effect on stock price of inclusion in or exclusion from the s p 500 financial analysts journal vol 43 no 1 pp 58 65

new evidence on stock price effects associated with changes in the s p 500 index since october 1989 standard and poor s has when possible announced changes in the composition of the s p 500 index one week in advance because index funds hold s p 500 stocks to minimize tracking error index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock using post october 1989 data the authors document significantly positive negative postannouncement abnormal returns that are only partially reversed following additions deletions these results indicate the existence of temporary price pressing and downward sloping long run demand curves for stocks and represent a violation of market efficiency copyright 1997 by university of chicago press

rational deterrence theory and comparative case studies several recent books have argued that comparative case studies of crises demonstrate the failure of rational deterrence theory they have offered certain empirical generalizations as substitutes this paper shows that such contentions are unwarranted first the empirical generalizations are impressive as historical insights but they do not meet the standards for theory set out by the most sophisticated case study analysts themselves second the tests of rational deterrence used in the case studies violate standard principles of inference and the ensuing procedures are so biased as to be useless rational deterrence then is a more successful theory than portrayed in this literature and it remains the only intellectually powerful alternative available case studies are essential to theory building more efficiently than any other methods they find suitable variables suggest middle range generalizations for theory to explain and provide the prior knowledge that statistical tests require their loose constraints on admissible propositions and suitable evidence are appropriate and even necessary for these tasks these same characteristics however inevitably undermine all attempts to construe case study generalizations as bodies of theory or tests of hypotheses

demand curves for stocks do not slope down evidence using an exogenous supply shock we analyze the price impact of an exogenous share sale of inside blockholders who were forced to sell a part of their shareholdings following a regulatory change in india the affected firms experience a negative excess return of 4 3 during the issue week crucially the price impact reverses within around 16 days of the event our results are consistent with the view that long term demand curves for stocks are flat this view is echoed in classical finance theories the short term price reaction to a sale is probably due to temporary price pressure

changes in the standard and poor s 500 list l harris and e gurel 1986 and a shleifer 1986 examined changes in the standard and poor s list both studies presented evidence inconsistent with efficient markets looking at newer data and at bond and option prices the authors find that case against market efficiency is not compelling copyright 1991 by university of chicago press

capital mobility and asset pricing we present a model for the equilibrium movement of capital between asset markets that are distinguished only by the levels of capital invested in each investment in that market with the greatest amount of capital earns the lowest risk premium intermediaries optimally trade off the costs of intermediation against fees that depend on the gain they can offer to investors for moving their capital to the market with the higher mean return the bargaining power of an investor depends on potential access to alternative intermediaries in equilibrium the speeds of adjustment of mean returns and of capital between the two markets are increasing in the degree to which capital is imbalanced between the two markets and can be reduced by competition among intermediaries

investing in the presence of massive flows the case of msci country reclassifications almost 10 trillion is benchmarked to msci s developed emerging frontier and standalone market indexes reclassifications from one index to another require thousands of investors to decide how to react we study a comprehensive sample of past reclassifications to inform this decision on average reclassified markets prices substantially overshoot between the announcement date and the effective date prices fall when a market moves from an index with more benchmarked ownership to one with less such as from emerging to frontier and vice versa but largely revert within a year we identify alpha maximizing responses to reclassifications for both benchmarked and more flexible investors

capital gains taxes and equity trading empirical evidence individual investors have an incentive to defer selling appreciated stock until it qualifies for tax favored long term capital gains treatment shackelford and verrecchia 2002 show that these incentives can affect equity trading around public disclosures this article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the s p 500 index we find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property the price increases however are temporary reversing in subsequent trading days the results are consistent with buyers believing the compensation to sell before long term qualification through higher prices is less costly than holding an inappropriately weighted portfolio this finding that personal capital gains taxes affect equity trading adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes

demand and supply and their relationship to liquidity evidence from the s p 500 change to free float in the context of the switch to free float weighting in the s p 500 index this study of the effect of the availability of shares on liquidity in the medium term found cross sectional differences in liquidity and price impact measures that gradually narrowed following each phase of the free float adjustment

heterogeneous borrowers liquidity and the search for credit abstract we develop a general equilibrium model of credit formation where borrowers and lenders must search for matches and where the composition of borrowers adjusts to satisfy equilibrium entry conditions when market liquidity dries up as a result of fundamental shocks to the system fewer borrowers will participate in the credit market with low quality borrowers suffering disproportionately because of a flight to quality however less liquid credit markets need not be associated with lower social output because the effect of higher average quality may outweigh that of reduced market participation depending crucially on the source of the liquidity shock

middlemen in bilateral search markets this article examines the role of middlemen in bilateral search markets e g employment agencies real estate brokers it is shown that the middleman narrows the set of buyer firm and seller worker types who search seller types with high valuations and buyer types with low valuations drop out of the search market and instead trade through the middleman the middleman also decreases the equilibrium search intensities of those agents who search it is proven that the middleman improves welfare if search is very costly and inefficient and decreases welfare if search is effectively costless and very efficient

anatomy of a government intervention in index stocks price pressure or information effects in a massive intervention designed to deter speculators the hong kong monetary authority hkma bought hang seng index stocks in august 1998 these stocks experienced a 24 abnormal return during the intervention period the abnormal returns are not reversed over the next eight weeks refuting the hypothesis that returns are due to temporary liquidity effects cross sectional analysis of daily abnormal returns during the intervention period reveals that these returns are related to overall intervention activity rather than stock specific intervention this evidence is consistent with information effects rather than price pressure effects

price and volume effects of changes in msci indices nature and causes abstract using changes in the msci standard country indices for 29 countries between 1998 and 2001 we document that stock returns and volumes exhibit index effects in international markets similar to those detected by the studies of us stocks the stocks added to the indices experience a sharp rise in prices after the announcement and a further rise during the period preceding the actual change though part of the gain is lost after the actual change date the stocks that are deleted from the indices on the other hand witness a steady and marked decline in their prices trading volumes increase significantly and remain at high levels after the change date for the added stocks there are also considerable cross country variations in these effects tests using data on various measures reflecting the different hypotheses fail to turn up any evidence in support of information effects our evidence appears to be more supportive of the downward sloping demand curve hypothesis there is some evidence of price pressure and mild evidence of liquidity effect particularly in japan and uk

economic search an experimental study this paper presents results of experiments designed to test several of the hypotheses present in the theoretical literature on optimal economic search first we test whether the subjects searchers actually search for wages in ways that are consistent with setting an optimal reservation wage we then proceed to determine experimentally the effects of risk aversion increased search costs changes in risk brought about by a mean preserving transformation of the distribution of wage offers the presence or absence of recall the existence of a finite horizon and the searcher s state of knowledge about the underlying distribution of wages in general we find that the searchers exhibit behavior that is consistent with that predicted by theory differences between risk neutral and risk averse searchers are found and the responses of both groups to changes in search costs in the degree of risk or in the state of knowledge are consistent with theoretical predictions

episodic liquidity crises cooperative and predatory trading we describe how episodic illiquidity arises from a breakdown in cooperation between market participants we first solve a one period trading game in continuous time using an asset pricing equation that accounts for the price impact of trading then in a multi period framework we describe an equilibrium in which traders cooperate most of the time through repeated interaction providing apparent liquidity to one another cooperation breaks down when the stakes are high leading to predatory trading and episodic illiquidity equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity but cause contagion when cooperation breaks down why is illiquidity rare and episodic pastor stambaugh 2003 detect only 14 aggregate low liquidity months over the time period 1962 to 1999 despite being of significant magnitude most of the episodes were short lived and were followed by long periods of liquidity 1 the origin of this empirical observation still remains a puzzle in this paper we attempt to shed light on this puzzle by developing a theoretical model in which a breakdown in cooperation between traders in the market manifests itself in predatory trading this mechanism leads to sudden and short lived illiquidity we develop a dynamic model of trading based on liquidity needs during each period a liquidity event may occur in which a trader is required to liquidate a large block of an asset in a relatively short time period this need for liquidity is observed by a tight oligopoly whose members may choose to predate or cooperate predation involves racing and fading the distressed trader to the market

risk attitudes and reservation wages of unemployed workers evidence from panel data abstract this paper studies risk attitudes of unemployed job seekers and their relationship to self reported reservation wages we find that risk aversion is prevalent and that reservation wages decrease slightly over time furthermore risk aversion and reservation wages are negatively correlated

a unified theory and test of extended immediate deterrence we present a unified theory and test of extended immediate deterrence unified in the sense that we employ our theoretical deterrence model as our statistical model in the empirical analysis the theoretical model is a straightforward formalization of the deterrence logic in huth 1988 and huth and russett 1984 coupled with private information concerning utilities our statistical analysis suggests that the attacker and defender s decisions are influenced by the balance of forces nuclear weapons defender protege military alliances arms transfers and trade as well as the regime types of those involved many of these findings contradict previous research by huth 1988 and huth and russett 1988 we find that many of the variables involved in the deterrence calculus are nonmonotonically linked to the probability of deterrence success or war we illustrate the results with case studies of the soviet japanese dispute over manchukuo 1937 1938 and the berlin blockade 1948

auction and the informed seller problem a seller possessing private information about the quality of a good attempts to sell it through a second price auction with announced reserve price the choice of a reserve price transmits information to the buyers we characterize the equilibria with monotone beliefs of the resulting signalling game and show that they lead to a reduced probability of selling the good compared to the symmetric information situation we compare the unique separating equilibrium of this signalling game to the equilibrium of a screening game in which an uninformed monopoly broker chooses the trading mechanism we show that the ex ante expected probability of trade may be larger with a monopoly broker as well as the ex ante total expected surplus

labor market search an experimental study the theoretical results derived from models of economic search have implications which relate to the structure and performance of labor markets utilizing a series of laboratory experiments we attempt to capture many of the features of workers search and also the conditions under which labor markets operate by varying certain of the experimental conditions we are able to determine the searchers responses to changes in the terms of unemployment insurance to the existence of a minimum wage and to different states of information about the underlying distribution of wages in most cases the behavior of the searchers is consistent with that predicted by theory

stock return comovement around the dow jones islamic market world index revisions we examine patterns of comovement in stock returns around the dow jones islamic market world index djimwi quarterly revision events our analysis is based on a sample of 8250 companies from eighteen countries during the period may 1999 june 2012 we find that a stock s comovement with the djimwi increases when it joins and decreases when it leaves the index we also find that the comovement of newly added deleted stocks with the existing djimwi constituents increases declines during periods of high trading activity and during the month of ramadan further tests reveal that changes in the fundamentals have no impact on the comovements of added and deleted stocks overall our results indicate that stock returns respond to the emotional state of investors around information free events

trading networks with price setting agents abstract in a wide range of markets individual buyers and sellers trade through intermediaries who determine prices via strategic considerations typically not all buyers and sellers have access to the same intermediaries and they trade at correspondingly different prices that reflect their relative amounts of power in the market we model this phenomenon using a game in which buyers sellers and traders engage in trade on a graph that represents the access each buyer and seller has to the traders we show that the resulting game always has a subgame perfect nash equilibrium and that all equilibria lead to an efficient allocation of goods finally we analyze trader profits in terms of the graph structure roughly a trader can command a positive profit if and only if it has an essential connection in the network thus providing a graph theoretic basis for quantifying the amount of competition among traders

index composition changes and the cost of incumbency abstract this paper provides evidence of information effects and portfolio rebalancing effects that occur when stocks are added to or excluded from the sp however the portfolio rebalancing effects dominate the industry information effects

price reaction of ethically screened stocks a study of the dow jones islamic market world index this paper investigates the short term effects on the price of the ethically screened stocks of the dow jones islamic market world index djimwi quarterly revisions using a sample of 8 250 stocks from may 1999 through june 2012 we find a significant price reaction of the ethically screened stocks following additions and deletions the results show that additions deletions from emerging stock markets tend to experience a greater and significantly positive negative price response than additions deletions from the developed markets further tests reveal that the price reactions following djimwi revisions are likely to be driven by shifts in investor sentiment rather than changes in firm fundamentals

price and volume effects associated with changes in the s p 500 list new evidence for the existence of price pressures attempts to identify price pressures caused by large transactions may be inconclusive if the transactions convey new information to the market this problem is addressed in an examination of prices and volume surrounding changes in the composition of the s p 500 since these changes cause some investors to adjust their holdings of the affected securities and since it is unlikely that the changes convey information about the future prospects of these securities they provide an excellent opportunity to study price pressures the results are consistent with the price pressure hypothesis immediately after an addition is announced prices increase by more than 3 percent this increase is nearly fully reversed after 2 weeks the efficient market hypothesis emh predicts that security prices reflect all publicly available information therefore one corollary of the emh is that you can sell or buy large blocks of stock at close to the market price as long as you can convince other investors that you have no private information 1 this statement assumes that securities are near perfect substitutes for each other if so the excess demand for a single security will be very elastic and the sale or purchase of a large number of shares will have no impact on price in contrast to the emh scholes 8 kraus and stoll 5 hess and frost 4 and others propose two hypotheses which predict that a large stock sale purchase will cause the price to decrease increase even if no new information is associated with the transaction the imperfect substitutes hypothesis ish also known as the distribution effect hypothesis assumes that securities are not close substitutes for each other and hence that long term demand is less than perfectly elastic under this hypothesis equilibrium prices change when demand curves shift to eliminate excess demand price reversals are not expected because the new price reflects a new equilibrium distribution of security holders the price pressure hypothesis pph assumes that investors who accommodate demand shifts must be compensated for the transaction costs and portfolio risks that they bear when they agree to immediately buy or sell securities which they otherwise would not trade these passive suppliers of liquidity are attracted by immediate price drops rises associated with large sales purchases they are compensated for their liquidity service when prices rise drop to their fullinformation levels the pph like the emh assumes that long run demand is

drips and the dividend pay date effect on the day that dividends are paid we find a significant positive mean abnormal return that is completely reversed over the following days this dividend pay date effect has strengthened since the 1970s and is consistent with the temporary price pressure hypothesis the pay date effect is concentrated among stocks with dividend reinvestment plans drips and is larger for stocks with a higher dividend yield greater drip participation and greater limits to arbitrage over time profits from a trading strategy that exploits this behavior are positively related to the dividend yield and spread and negatively associated with aggregate liquidity

financial asset demand is elastic evidence from new issues of federal home loan bank debt abstract we estimate the slope of the demand curve for newly auctioned fhlb discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity our unique dataset of roughly 2900 observations of two price quantity pairs the first from a pre auction dealer survey the second from actual auction results provides the quantity shift necessary to identify demand in contrast to previous findings of downward sloping demand curves for equities we show that demand for newly issued fhlb notes is nearly perfectly elastic during normal market conditions we find however that frictions like arbitrage risk and to a lesser extent heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50 drop in elasticity observed during the recent financial crisis

endogenous outside options in coordination games experimental evidence abstract in this experiment traders choose between an outside option offered by an intermediary and playing a coordination game with each other the intermediary is either a broker or a dealer we find that intermediaries manage to attract traders even to offer levels lower than the payoff that traders could have obtained had they rejected the intermediary s offer for any given offer traders are more likely to accept a dealer s offer than a broker s offer the introduction of either intermediary type reduces average trader s earnings on the other hand intermediaries have a coordination role as predicted by the forward induction argument when traders reject the intermediary s offer and play the coordination sub game they achieve a significantly greater level of coordination

the price response to s p 500 index additions and deletions evidence of asymmetry and a new explanation we study the price effects of changes to the s p 500 index and document an asymmetric price response there is a permanent increase in the price of added firms but no permanent decline for deleted firms these results are at odds with extant explanations of the effects of index changes that imply a symmetric price response to additions and deletions a possible explanation for asymmetric price effects arises from the changes in investor awareness results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of s p 500 index additions and deletions the long held assumption that stocks have perfect substitutes and the perfect elasticity of demand that follows from it is central to modern finance theory if securities have almost perfectly elastic demand then any supply or demand shocks that are devoid of information should have no effect on the prevailing price early empirical research on whether price changes occur in the absence of new information focused on block trades equity issues and stock splits but was unable to exclude information effects around these events since there is no obvious reason to believe ex ante that index changes contain new information they constitute a natural framework for testing whether stocks have almost perfectly elastic or horizontal demand curves a stock s excess return around such changes could be consistent with a downward sloping demand curve with the advent of indexed mutual funds in 1976 and the public announcement of s p index changes in the same year there is much evidence that such announcements are accompanied by an increase in price for firms added to the index if stocks have a short term downward sloping demand curve the price should be momentarily affected by a demand shock due to indexing but that effect

stock price effects and costs of secondary distributions abstract this study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost a significant stock price decrease is observed at the initial announcement of secondary distributions the price declines are greater for offerings by officers and directors and for larger offerings but are significant for all types of sellers and for large and small offerings there is no significant price decline at the offering when secondaries are announced in advance underwriting and other selling costs are substantial and are positively related to relative offering size

search method use by unemployed youth this article presents a search model which shows that search method choices should be related to their costs and expected productivities as well as to nonwage income and wage offer distributions the empirical evidence then shows that the most frequently used search methods i e friends and relatives and direct applications without referral are also the most productive in generating offers and acceptances the number of methods used is affected by factors that presumably reflect opportunities as well as income sources and needs specific methods are chosen in a manner that generates positive average effects on outcomes for those using them

do demand curves for currencies slope down evidence from the msci global index change traditional portfolio balance theory derives a downward sloping currency demand function from limited international asset substitutability historically this theory enjoyed little empirical support we provide direct evidence by examining the exchange rate effect of a major redefinition of the msci international equity index in 2001 and 2002 the index changes implied large changes in the representation of different countries in the msci world index and therefore produced strong exogenous equity flows by index funds our event study shows a strong announcement effect in which countries with a decreasing equity representation vis a vis the u s depreciated against the dollar

do demand curves for stocks slope down since september 1976 stocks newly included into the standard and poor s 500 index have earned a significant positive abnormal return at the announcement of the inclusion this return does not disappear for at least ten days after the inclusion the returns are positively related to measures of buying by index funds consistent with the hypothesis that demand curves for stocks slope down the returns are not related to s p s bond ratings which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

anticipated and repeated shocks in liquid markets we show that treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after this price pattern implies a large issuance cost for the treasury department which is estimated to be between 9 and 18 basis points of the auction size for example this cost amounts to over half a billion dollars for issuing treasury notes alone in 2007 our results appear to be consistent with the hypothesis of primary dealers limited risk bearing capacity and the imperfect capital mobility of end investors in the treasury market e g federal agencies sovereign wealth funds pension funds and etc highlighting the important role of capital mobility even in the most liquid financial markets

real time search in the laboratory and the market the standard model of labor market search posits repeated infinite horizon search from a fixed distribution of wages in a stationary environment under these circumstances the optimal search policy has a reservation wage property i e the decision to accept an offer involves a comparison of the offer with a time invariant constant w which itself is a function of the parameters characterizing the search environment a wage offer greater than or equal to w is accepted while any other is rejected and search is continued some early empirical job search studies however accumulated evidence of a declining trend in reservation wages over the course of an unemployment spell 1 since then several theoretical explanations for the declining reservation wage profiles have emerged all of which relax the stationarity assumption of the standard model for example reuben gronau 1971 assumes searchers have finite lives kenneth burdett 1977 gerard j van den berg 1990 james albrecht and susan vroman 2005 and others model short term unemployment benefits albrecht pieter a gautier and vroman 2006 permit directed search to heterogeneous prospects 2 john p danforth 1979 and silvio rendon 2006 consider general liquidity con strained search and burdett and tara vishwanath 1988 model learning about the job offer distribution behavioral explanations for declining reservation wages have been suggested by braunstein and schotter 1981 schotter and braunstein 1982 and others in this paper we present the results of the first ever to our knowledge real time search laboratory experiment performed in an effort to investigate this falling res ervation wage phenomenon where field studies of unemployed search often rely on strong identifying assumptions to recover searchers unobservable reservation wages in the laboratory we are able to elicit subjects complete reservation wage profiles in an incentive compatible manner 3 further in the laboratory we are able to

rational deterrence and crisis stability this paper presents a new game theoretic model of nuclear crises that maintains consistency with the usual chicken and prisoner s dilemma metaphors within a repeated continuous game framework it establishes the existence of totally credible because always optimal deterrence strategies that are the expression of threats of graduated retaliations in response to an encroachment of status quo drawing a careful distinction between the three fundamental kinds of nuclear threats the risk of losing control the graduated response and the massive retaliation the theory predicts that a hawkish stand in response to aggression by an approximately equal nuclear opponent leads to an almost certain nuclear disaster a completely dovish approach invites exploitation by a hawkish opponent who can maneuver a partial victory a successful policy involves retaliations that are restrained at first but that become increasingly firm if the opponent refuses to compromise a firm and restrained strategy forces a rational opponent into a similar behavior the result is a safe return to the status quo ante i e crisis stability the theory is illustrated by a numerical simulation of the cuban missile crisis showing the outcomes of various strategies available to the united states and the soviet union the simulation and the theory suggest a reformulation of nuclear strategies the key to credibility and crisis stability lies in the threat to exact costs that cancel any prior benefit from aggression not in the promise to impose equal or greater punishments

exclusive nightclubs and lonely hearts columns non monotone participation in optional intermediation in many decentralised markets the traders who benefi tm ost from an exchange do not employ intermediaries even though they could easily afford them at the same time employing intermediaries is not worthwhile for traders who benefit little from trade together these decisions amount to non monotone participation choices in intermediation only traders of middle type employ intermediaries while the rest the high and the low types prefer to search for a trading partner directly we provide a theoretical foundation for this hitherto unexplained phenomenon we build a dynamic matching model where a trader s equilibrium bargaining share is a convex increasing function of her type we also show that this is indeed a necessary condition for the existence of non monotone equilibria