option pricing with an illiquid underlying asset market abstract we examine how price impact in the underlying asset market affects the replication of a european contingent claim we obtain a generalized black scholes pricing pde and establish the existence and uniqueness of a classical solution to this pde unlike the case with transaction costs we prove that replication with price impact is always cheaper than superreplication compared to the black scholes case a trader generally buys more stock and borrows more shorts and lends more to replicate a call put furthermore price impact implies endogenous stochastic volatility and an out of money option has lower implied volatility than an in the money option this finding has important implications for empirical analysis on volatility smile

are price limits really bad for equity markets despite widely documented criticisms price limit rules are present in many equity markets around the world using a game theoretic model we argue that if the cost of monitoring a market is high price limit rules are beneficial empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction we find that the probability of the existence of price limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure more corruption and less efficiency in legal regulatory and technological environments

firing costs and business cycle fluctuations this article considers a real business cycle model with establishment level dynamics and uses it to analyze the effects of firing taxes it finds that firing taxes can have significant consequences on business cycle fluctuations that the largest effects are on aggregate employment and that even relatively small firing taxes have substantial effects a significant contribution of the article is computational it describes how to use standard linear quadratic methods to solve for a stochastic equilibrium of an s s economy with tax distortions

entrepreneurial tail risk implications for employment dynamics starting a new business is risky this paper asks how entrepreneurial productivity risk has changed over time in the us and how this has affected employment i estimate this risk using micro data on the size distribution of new businesses and their exit rates the paper distinguishes upside and downside risk and analyzes their effects in a tractable dynamic general equilibrium of entrepreneurship at the heart of the model is the decision of potential entrepreneurs whether to start a new business in the face of uninsurable productivity risk applied to us time series data structural estimates suggest that higher upside risk explains much of the high job creation in the late 1990s over the entire sample period time variation in risk explains 40 to 55 of the variation in employment of new businesses reduced form results show that this relationship is strongest in it related industries counterfactual simulations show that the explanatory power of a model with a single risk factor drops by 30 to 50 compared to the baseline estimates

price manipulation in an experimental asset market we analyze in the laboratory whether an uninformed trader is able to manipulate the price of a financial asset by comparing the results of two experimental treatments in the benchmark treatment 12 subjects trade a common value asset that takes either a high or a low value only three subjects know the actual value of the asset while the market is open for trading the manipulation treatment is identical to the benchmark treatment apart from the fact that we introduce a computer program as an additional uninformed trader this robot buys a fixed number of shares in the beginning of a trading period and sells them again afterwards our main result shows that the last contract price is significantly higher in the manipulation treatment if the asset takes a low value and that private information is very well disseminated by both markets if the value of the asset is high finally even though this simple manipulation program loses money on average it is profitable in some instances

does short selling amplify price declines or align stocks with their fundamental values critics of short selling argue that short sellers amplify price declines by targeting firms with falling prices in an unwarranted manner contrary to this viewpoint we find that increases in short interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis our results extend to short selling activity following marketwide declines we also find evidence consistent with the profitability of short selling following price declines being driven by valuation based positions overall our findings suggest short sellers primarily undertake valuation based strategies following price declines and have implications for regulators limiting short selling following price declines is likely to impede efficient price discovery this paper was accepted by mary barth accounting

microstructure bluffing with nested information chakraborty and yilmaz 2004a b con sider strategic models of repeated trading by an informed insider with long lived private infor mation they show that if market makers face uncertainty about the existence of informed trades in the order flow then with sufficiently many periods of trading the insider will bluff in every equilibrium in the precise sense ruled out in albert s kyle 1985 1323 i e by first destabilizing prices with unprofitable trades made at the nth auction then recouping the losses and much more with profitable trades at future auctions by bluffing the insider adds noise to the market s inference problem and makes prices less sensitive to his trades in this note we demonstrate how the scope for profitable bluffing is enhanced by the pres ence of other rational informed traders in the

a unique t 1 trading rule in china theory and evidence abstract unique to the world china adopts a t 1 trading rule which prevents investors from selling stocks bought on the same day we develop a dynamic price manipulation model to study the effects of the t 1 trading rule compared to the t 0 trading rule which allows investors to buy and sell the same stocks during the same day we show that the t 1 trading rule reduces the total trading volume and price volatility and improves the trend chasers welfare when trend chasing is strong an empirical test using data on china s b share stock market supports the model s theoretical predictions

entrepreneurial finance and nondiversifiable risk w e develop a dynamic incomplete markets model of entrepreneurial firms and demonstrate the implications of nondiversifiable risks for entrepreneurs interdependent consumption portfolio allocation financing investment and business exit decisions we characterize the optimal capital structure via a generalized tradeoff model where risky debt provides significant diversification benefits nondiversifiable risks have several important implications more risk averse entrepreneurs default earlier but choose higher leverage lack of diversification causes entrepreneurial firms to underinvest relative to public firms and risky debt partially alleviates this problem and entrepreneurial risk aversion can overturn the risk shifting incentives induced by risky debt we also analytically characterize the idiosyncratic risk premium jel g11 g31 e20

the burden of the nondiversifiable risk of entrepreneurship entrepreneurship is risky we study the risk facing a well documented and important class of entrepreneurs those backed by venture capital using a dynamic program we calculate the certainty equivalent of the difference between the cash rewards that entrepreneurs actually received over the past 20 years and the cash that entrepreneurs would have received from a risk free salaried job the payoff to a venture backed entrepreneur comprises a below market salary and a share of the equity value of the company when it goes public or is acquired we find that the typical venture backed entrepre neur received an average of 5 8 million in exit cash almost three quarters of entrepreneurs receive nothing at exit and a few receive over a billion dollars because of the extreme dispersion of payoffs an entrepreneur with a coefficient of relative risk aversion of two places a certainty equivalent value only slightly greater than zero on the distribution of outcomes she faces at the time of her company s launch jel g24 g32 l26 m13

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

market manipulation price bubbles and a model of the u s treasury securities auction market this paper models the u s treasury securities auction market and demonstrates that mar ket manipulation can occur in a rational equilibrium it is a dynamic model with traders participating in a when issued market a treasury auction and a resale market manipu lations occur when dealers in the when issued market use their knowledge of the net order flow in order to corner the auction and squeeze the shorts from the when issued market this manipulation equilibrium generates bubbles in treasury security prices and specials in repo rates we also compare discriminatory and uniform price auction rules with respect to manipulation our analysis shows that manipulations can occur in long run equilibrium under discriminatory price auctions but not under uniform price auctions

delegated trading and the speed of adjustment in security prices abstract institutional trading arrangements often involve the portfolio manager delegating the task of trade execution to a separate division within the firm we model the agency conflict that arises in this setting and show that optimal performance benchmarks often create an incentive to execute orders contrary to concurrent information flow we hypothesize that aggregate contrarian trading resulting from widespread application of such benchmarks leads to delays in the assimilation of information in security prices using institutional trading data we document the hypothesized contrarian trading pattern and relate the pattern to price adjustment delays in the response of individual stocks to index futures returns the evidence supports the assertion that delegated institutional trading contributes to these delays

high frequency trading and extreme price movements abstract are endogenous liquidity providers elps reliable in times of market stress we examine the activity of a common elp type high frequency traders hfts around extreme price movements epms we find that on average hfts provide liquidity during epms by absorbing imbalances created by non high frequency traders nhfts yet hft liquidity provision is limited to epms in single stocks when several stocks experience simultaneous epms hft liquidity demand dominates their supply there is little evidence of hfts causing epms

risk aversion liquidity and endogenous short horizons we analyze a competitive model in which different information signals get reflected in value at different points in time if investors are sufficiently risk averse we obtain an equilibrium in which all investors focus exclusively on the short term in addition we show that increasing the variance of informationless trading increases market depth but causes a greater proportion of investors to focus on the short term signal which decreases the informativeness of prices about the long run finally we also explore parameter spaces under which long term informed agents wish to voluntarily disclose their information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

information disclosure and price manipulation during the pre closing session evidence from an order driven market on 20 february 2012 the taiwan stock exchange corporation launched an order matching simulation mechanism for five minutes during the start of the pre closing session in order to increase information disclosure during this period 13 25 13 30 pre closing information disclosure significantly reduces both trading costs and closing price volatility as well as price manipulation the decrease in price manipulation found in this work is due to pre closing information disclosure not the behaviour of investors shifting to an earlier time further if a stock price rises or falls by more than 3 5 in the simulation in the last minute during the closing session trading of the stock will be suspended for two minutes from 13 31 to reduce volatility however this trading mechanism suspended closing does not seem to have achieved the intended goals of the authorities as it has not been able to significantly reduce closing price volatility and price manipulation

the impact of fraudulent false information on equity values there are two types of stock price manipulation examined in the theoretical literature 1 insider trading which involves private information that is true and 2 the public spreading of fraudulent false information while there is a large empirical literature on insider trading this is the first empirical article to examine the impact of false fraudulent public information on stock prices and trading volume we find that such false information even after being denied by a credible source such as the sec generates both abnormal returns and abnormal trading volume we also find that the effects of the false information on security returns and volume can be persistent for at least 2 weeks in addition we show that perpetrators of false news attacks can make potentially large profits from such market manipulations

outcome manipulation in corporate prediction markets this paper presents a framework for applying prediction markets to corporate decision making the analysis is motivated by the recent surge of interest in markets as information aggregation devices and their potential use within firms we characterize the amount of outcome manipulation that results in equilibrium and the impact of this manipulation on market prices jel d71 d82 d83 d84

grown up business cycles the entry rate of u s employer businesses has declined for more than 30 years we use a novel dynamic decomposition framework to show that regardless of its causes the direct effects of the continued decline in the entry rate and its delayed effects on the firm age distribution together play a major role in the slowing of trend employment growth and the emergence of jobless recoveries we identify changing demographic structure of the population and increased import competition as leading factors behind the decline in startup activity received september 1 2015 editorial decision april 5 2018 by editor francesca cornelli authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

the antidirector rights index revisited the antidirector rights index has been used as a measure of shareholder protection in over a hundred articles since it was introduced by la porta et al law and finance 1998 journal of political economy 106 1113 55 a thorough reexamination of the legal data however leads to corrections for thirty three of the forty six countries analyzed the correlation between corrected and original values is only 0 53 consequently many empirical results established using the original index may not be replicable with corrected values in particular the corrected index fails to support three widely influential claims that shareholder protection is higher in common than in civil law countries that shareholder protection predicts stock market size or ownership dispersion and that weak corporate governance explains the extent of exchange rate depreciation during the asian financial crisis of 1997 1998 the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

does insider trading raise market volatility this paper studies the role of insider trading in explaining cross country differences in stock market volatility it introduces a new measure of insider trading the central finding is that countries with more prevalent insider trading have more volatile stock markets even after one controls for liquidity maturity of the market and the volatility of the underlying fundamentals volatility of real output and of monetary and fiscal policies moreover the effect of insider trading is quantitatively significant when compared with the effect of economic fundamentals

manipulation in the vix at the settlement time of the vix volatility index volume spikes on sp editorial decision june 19 2017 by editor robin greenwood

equilibrium pricing and trading volume under preference uncertainty information collection processing and dissemination financial institutions is challenging this can delay the observation by traders of the exact capital charges and constraints of their institution during this delay traders face preference uncertainty in this context we study optimal trading strategies and equilibrium prices in a continuous centralized market we focus on liquidity shocks during which preference uncertainty is likely to matter most preference uncertainty generates allocative ineficiency but need not reduce prices traders progressively learning about the preferences of their institution conduct round trip trades which generate excess volume relative to the frictionless market in a cross section of liquidity shocks the initial price drop is positively correlated with total trading volume across traders the number of round trips is negatively correlated with trading profits and average inventory

manipulating market sentiment we analyze a simple model of an asset market in which a large rational trader interacts with noise speculators who seek short run speculative gains and become active following a prolonged episode of mispricing relative to the asset s fundamental value the model gives rise to price patterns such as bubble dynamics positive short run correlation and vanishing long run correlation of price deviations from the fundamental value we argue that this example model sheds light on the question as to whether rational speculators abet or curb price fluctuations

house prices collateral and self employment this paper explores the role of the collateral lending channel to facilitate small business starts and self employment in the period before the financial crisis of 2008 we document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries this increase in small business employment was particularly pronounced in industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral our results highlight the importance of the collateral lending channel during the period of the house price boom in the creation of small establishments we show that this effect is separate from the aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation

market conditions fragility and the economics of market making abstract using audit trail data from the toronto stock exchange we find that market makers scale back in unison when market conditions are unfavorable which contributes to covariation in liquidity supply both within and across stocks market conditions lower aggregate participation via their impact on trading profits and risk contrary to regulatory view higher stock volatility is associated with more participation and higher profits even after controlling for other market conditions including stock volume fragility concerns extend to larger stocks and to active participants the designated market maker mitigates periodic illiquidity created by synchronous withdrawal of market makers in large and small stocks

international banks as leaders or followers of international business an historical perspective abstract international banking and international trade have been partners since the beginning of world trade and world finance indeed the distinction between international trade and international finance as two separate functions and institutions is relatively recent banks and business firms are two parts of a world network therefore there is no easy answer to the question as to whether banks follow or lead international business it is probable that where banks are aggressive in building world networks and industries focus on single projects banks lead and industry follows but under the opposite conditions the roles will reverse there is no way to determine which of the two processes is dominant

the role of startups for local labor markets there are substantial differences in startup activity across us local labor markets we study the causes and consequences of these differences startup productivity shocks are found to drive much of these cross city differences in startup activity examples of such shocks include breakthroughs in biotech that spurred startup formation in san diego and philadelphia overall these shocks explain half of the forecast error variance of startup job creation accounting for 40 of population growth and long run changes in employment shocks to barriers to firm entry have economy wide effects similar to those of startup productivity shocks but operate largely through the number of startups rather than their size we use a novel spatial panel vector autoregression identifying shocks using shift share external instruments

information aggregation and manipulation in an experimental market prediction markets are increasingly being considered as methods for gathering summarizing and aggregating diffuse information by governments and businesses alike critics worry that these markets are susceptible to price manipulation by agents who wish to distort decision making we study the effect of manipulators on an experimental market we find that manipulators are unable to distort price accuracy subjects without manipulation incentives compensate for the bias in offers from manipulators by setting a different threshold at which they are willing to accept trades

strategic trading behavior and price distortion in a manipulated market anatomy of a squeeze abstract this paper investigates an attempted delivery squeeze in a bond futures contract traded in london using cash and futures trades of dealers and customers we analyze their strategic trading behavior price distortion and learning in a market manipulation setting we argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes we recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates and that exchanges mark to market their contract specifications more frequently or consider a cash settled contract on a basket of bonds

trading frequency and volatility clustering abstract volatility clustering with autocorrelations of the hyperbolic decay rate is unquestionably one of the most important stylized facts of financial time series this paper presents a market microstructure model that is able to generate volatility clustering with hyperbolically decaying autocorrelations via traders with multiple trading frequencies using bayesian information updates in an incomplete market the model illustrates that signal extraction which is induced by multiple trading frequencies can increase the persistence of the volatility of returns furthermore we show that the volatility of the underlying time series of returns varies greatly with the number of traders in the market

a global stock and bond model six fundamental risk factors four for stocks and two for bonds explain most of the common volatility of individual stocks and bonds worldwide some of the risk factors have a strong international component and others are more purely national the cross national component of the risk factors tends to be stronger within the european union than worldwide the model proposed in this article can be used for integration of worldwide asset selection and asset allocation decisions

anticipatory traders and trading speed we examine whether speed is an important characteristic of traders who anticipate local price trends these anticipatory participants correctly trade prior to the overall market and systematically act before other participants they use manual and algorithmic order entry methods but most are not fast enough to be high frequency traders hfts those anticipating price trends have impacts as if they are informed traders while the case for anticipatory participants affecting the volume of other traders is rejected a follow up sample shows significant attrition in accounts and difficulty maintaining the anticipatory strategies to identify anticipatory traders we devise novel methods to isolate local price trends using order book data from the west texas intermediate wti crude oil futures market

bidder behavior in multiunit auctions evidence from swedish treasury auctions we analyze a unique data set on multiunit auctions which contains the actual demand schedules of the bidders as well as the auction awards in over 400 swedish treasury auctions first we document that bidders vary their prices bid dispersion and the quantity demanded in response to increased uncertainty at the time of bidding second we find that bid shading can be explained by a winner s curse driven model in which each bidder submits only one bid despite the fact that the bidders in our data set use much richer bidding strategies third we explore the extent to which the received theories of multiunit auctions are able to offer insights into the bidder behavior we observe our empirical evidence is consistent with some of the predictions of the models of auctions that emphasize private information the winner s curse and the champion s plague while the models of multiunit auctions serve as useful guideposts our empirical findings also point to several new areas of research in multiunit auctions

stock price manipulation it is generally agreed that speculators can make profits from insider trading or from the release of false information both forms of stock price manipulation have now been made illegal in this article the authors ask whether it is possible to make profits from a different kind of manipulation in which an uninformed speculator simply buys and sells shares they show that in a rational expectations framework where all agents maximize expected utility it is possible for an uninformed manipulator to make a profit provided investors attach a positive probability to the manipulator being an informed trader article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the role of entrepreneurship in us job creation and economic dynamism the united states has long been viewed as having among the world s most entrepreneurial dynamic and flexible economies it is often argued that this dynamism and flexibility has enabled the us economy to adapt to changing economic circumstances and recover from recessions in a robust manner while the evidence provides broad support for this view the outcomes of entrepreneurship are more heterogeneous than commonly appreciated and appear to be evolving in ways that could raise concern evidence along a number of dimensions and a variety of sources points to a us economy that is becoming less dynamic of particular interest are declining business startup rates and the resulting diminished role for dynamic young businesses in the economy we begin by describing how the concept of entrepreneurship is reflected in existing data on firm age and size the recent addition of firm age to official statistics represents a dramatic improvement in the information available to entrepreneurship researchers we then turn to a discussion of the role of startup firms in job creation business startups account for about 20 percent of us gross total job creation while high growth businesses which are disproportionately young

solving heterogeneous agent models by projection and perturbation the paper proposes a numerical solution method for general equilibrium models with a continuum of heterogeneous agents that combines elements of projection and of perturbation methods the basic idea is to solve first for the stationary solution of the model without aggregate shocks but with fully specified idiosyncratic shocks afterwards one computes a first order perturbation of the solution in the aggregate shocks this approach allows to include a high dimensional representation of the cross sectional distribution in the state vector the method is applied to a model of household saving with uninsurable income risk and liquidity constraints techniques are discussed to reduce the dimension of the state space such that higher order perturbations are feasible

a battle of informed traders and the market game foundations for rational expectations equilibrium abstract potential manipulation of prices and convergence to rational expectations equilibrium is studied in a game without noise traders informed players with initially long and short positions bulls and bears seek to manipulate consumer expectations in opposite directions in equilibrium period 1 prices reveal the state so manipulation is unsuccessful bears and uninformed consumers sell up to their short sale limits in period 1 bulls buy in period 1 but receive arbitrage losses when the number of bulls and bears approaches infinity the equilibrium converges to the ree without short sale constraints there is a non revealing equilibrium but no revealing equilibrium

high frequency trading and end of day price dislocation abstract we show that the presence of high frequency trading hft has significantly mitigated the frequency and severity of end of day price dislocation the effect of hft is more pronounced on days when end of day price dislocation is more likely to be the result of market manipulation moreover the effect of hft is more pronounced than the role of trading rules surveillance enforcement and legal conditions in curtailing the frequency and severity of end of day price dislocation we show our findings are robust to different proxies of the start of hft by trade size cancellation of orders and co location

why regulate insider trading evidence from the first great merger wave 1897 1903 we use event time methodology to study legal insider trading associated with mergers circa 1900 for mergers with prospective disclosures similar to today s we find substantial value gains at announcement implying participation by outside shareholders despite the absence of insider constraints furthermore preannouncement stock price runups relative to total value gain are no more than those observed for modern mergers insider regulation apparently has produced little benefit for outsiders with the inside information pricing function and related gains shifting to external information specialists other results suggest market penalties for nondisclosure i e insider trading is less successful in a restricted information environment

speed algorithmic trading and market quality around macroeconomic news announcements this paper documents that speed is crucially important for high frequency trading strategies based on u s macroeconomic news releases using order level data on the highly liquid s p 500 etf traded on nasdaq from january 6 2009 to december 12 2011 we find that a delay of 300 ms or more significantly reduces returns of news based trading strategies this reduction is greater for high impact news and on days with high volatility in addition we assess the effect of algorithmic trading on market quality around macroeconomic news in the minute following a macroeconomic news arrival algorithmic activity increases trading volume and depth at the best quotes but also increases volatility and leads to a drop in overall depth quoted half spreads decrease increase when we measure algorithmic trading over the full top of the order book

what explains the lagged investment effect abstract the best predictor of current investment at the firm level is lagged investment this lagged investment effect is empirically more important than the cash flow and q effects combined we show that the specification of investment adjustment costs proposed by christiano et al 2005 predicts the presence of a lagged investment effect and that a generalized version of their model is consistent with the behavior of firm level data from compustat

lending by example direct and indirect effects of foreign banks in emerging markets using a novel dataset that allows us to trace the bank relationships of a sample of mostly unlisted firms we explore which borrowers are able to benefit from foreign bank presence in emerging markets our results suggest that the limits to financial integration are less tight than the static picture of firm bank relationships implies even though foreign banks are more likely to engage large and foreign owned firms after an acquisition a bank is 20 less likely to terminate a relationship with a firm if the acquirer is foreign rather than domestic most importantly within a credit market firms appear to have the same access to financial loans and ability to invest whether they borrow from a foreign bank or not while foreign banks benefit all firms by indirectly enhancing credit access

service multinationals conceptualization measurement and theory the application of mne definitions measurements and theories to international services is still in its infancy despite the considerable size and growth of this sector there are problems in defining classifying measuring comparing and explaining service mnes but they do not require special definitions and theories still research to date suggests 1 delinking the concepts of multinational enterprise and foreign direct investment under certain conditions and 2 qualifying the nature of ownership internalization and location advantages in fdi theory as far as service mnes are concerned

non fundamental speculation we study an intertemporal asset market where insiders coexist with non fundamental speculators non fundamental speculators possess no private information on fundamental values of assets but have superior knowledge about some aspect of the market environment we show that the entry of these rational speculators can lead to reductions in market liquidity and in the information content of prices even in an efficient market also equilibrium trades display patterns of empirical interest for example speculators appear to chase trends and lose money after market overreactions while insiders trade as contrarians and profit after such overreactions

corporate prediction markets evidence from google ford and firm x despite the popularity of prediction markets among economists businesses and policymakers have been slow to adopt them in decision making most studies of prediction markets outside the lab are from public markets with large trading populations corporate prediction markets face additional issues such as thinness weak incentives limited entry and the potential for traders with biases or ulterior motives raising questions about how well these markets will perform we examine data from prediction markets run by google ford motor company and an anonymous basic materials conglomerate firm x despite theoretically adverse conditions we find these markets are relatively efficient and improve upon the forecasts of experts at all three firms by as much as a 25 reduction in mean squared error the most notable inefficiency is an optimism bias in the markets at google the inefficiencies that do exist generally become smaller over time more experienced traders and those with higher past performance trade against the identified inefficiencies suggesting that the markets efficiency improves because traders gain experience and less skilled traders exit the market

determinants of the performance of japanese financial institutions in australia 1987 1992 this paper constructs a model that attempts to explain the performance of japanese financial institutions in australia in general the model proposed performs well for size measures but comparatively poorly for measures of profitability size as measured by home country equity was found to increase both australian assets and australian profitability institutional features in both australia and japan were found to have their greatest impact upon size measures net interest margin differences were found to have no significant relationship with any performance measure used however the results are not sufficiently conclusive to produce a definitive model to explain the performance of foreign owned banks in australia

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

explaining asset prices with external habits and wage rigidities in a dsge model in this paper i investigate the scope of a model with exogenous habit formation or catching up with the joneses see abel 1990 to generate the observed equity premium as well as other key macroeconomic facts along the way i derive restrictions for four out of eight parameters for a rather general preference specification of habit formation by imposing consistency with long run growth the leisure share the aggregate frisch elasticity of labor supply the observed risk free rate and the observed sharpe ratio i show that a dsge model with exogenous and lagged habits in both leisure and consumption but not necessarily with additional persistence is well capable of matching the observed asset market facts as well as macro facts provided one allows for moderate real wage stickiness and provided one allows for sufficient curvature on preferences as dictated by the asset market observations without wage stickiness delivery on both the asset pricing implications as well as the macroeconomic implications seems to be much harder

how to define illegal price manipulation the term illegal price manipulation is difficult to define current us law does not explicitly define it the finance and econom ics literature uses the term manipulation in an imprecise manner this paper proposes that a trading strategy not be classified as illegal price manipulation unless the violator s intent is to pursue a scheme that undermines eco nomic efficiency both by making prices less accurate as signals for efficient resource allo cation and by making markets less liquid for risk transfer since price effects are market wide we treat the terms price manipulation and market manipulation as synonyms our definition applies equally to financial and com modities markets

discriminatory versus uniform treasury auctions evidence from when issued transactions abstract we use when issued transactions data to assess the treasury s current experiment with uniform auctions when issued volume is higher under uniform as compared to discriminatory auctions suggesting a higher information release which should reduce pre auction uncertainty and the winner s curse under uniform auctions when issued volatility falls after the auction and again after the outcome announcement the pattern is the opposite for discriminatory auctions this is further evidence that uniform auctions increase pre auction information and lower the short squeeze a direct comparison of markups in uniform and discriminatory auctions yields mixed results

volume volatility and the dispersion of beliefs i examine a two period noisy rational expectations model of a futures market and show that the dispersion of expectations about a weighted average of future prices measures both the additional volatility and the additional expected volume of trade associated with noisy information the role played by dispersion helps clarify several stylized facts concerning volume and price behavior specifically dispersion can be a factor contributing to the positive correlation between volume and absolute price changes and the positive correlation between consecutive absolute price changes article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices

do prediction markets produce well calibrated probability forecasts this article presents new theoretical and empirical evidence on the forecasting ability of prediction markets we develop a model that predicts that the time until expiration of a prediction market should negatively affect the accuracy of prices as a forecasting tool in the direction of a favourite longshot bias that is high likelihood events are underpriced and low likelihood events are over priced we confirm this result using a large data set of prediction market transaction prices prediction markets are reasonably well calibrated when time to expiration is relatively short but prices are significantly biased for events farther in the future when time value of money is considered the miscalibration can be exploited to earn excess returns only when the trader has a relatively low discount rate

a manipulator can aid prediction market accuracy prediction markets are low volume speculative markets whose prices offer informative forecasts on particular policy topics observers worry that traders may attempt to mislead decision makers by manipulating prices we adapt a kyle style market microstructure model to this case adding a manipulator with an additional quadratic preference regarding the price in this model when other traders are uncertain about the manipulator s target price the mean target price has no effect on prices and raising the variance of the target price can increase average price accuracy by boosting the returns to informed trading and thereby incentives for traders to become informed

the stock pools and the securities exchange act abstract the stated justification for the securities exchange act of 1934 exchange act was to eliminate manipulation the primary evidence of manipulation was the existence of stock pools through which groups of traders jointly traded in a particular stock the conclusion of congress that the pools were manipulative is inconsistent with the evidence produced by the senate s own investigation the returns on a sample of pool stocks are also inconsistent with manipulation these findings suggest that congressional and presidential desires to increase political control over the new york stock exchange was a more important motivation for the exchange act