the informational role of stock and bond volume in a kyle 1985 model the sign of the correlation between a firm s debt and equity returns is the same as the sign of the cross market kyle s lambda the sign is positive negative if private information concerns the mean risk of the firm s assets we show empirically that information conveyed by order flows is primarily about asset means the cross market lambdas are quite large consequently the portions of bond and stock returns explained by order flows are highly correlated even though the order flows themselves are virtually uncorrelated

financial intermediation with risk aversion the paper extends diamond s 1984 analysis of financial intermediation to allow for risk aversion of the intermediary it shows that as in the case of risk neutrality the agency costs of external funds provided to an intermediary are relatively small if the intermediary is financing many entrepreneurs with stochastically independent returns even though the intermediary is adding rather than subdividing risks the underlying large numbers argument is not invalidated by the presence of risk aversion with risk aversion of entrepreneurs as well as the intermediary financial intermediation provides insurance as well as finance in contrast to earlier results on optimal intermediation policies under risk neutrality the paper shows that when an intermediary is financing many entrepreneurs with stochastically independent returns optimal intermediation policies must shift return risks away from risk averse entrepreneurs and impose them on the intermediary or on final investors

risk taking savings and taxation a reexamination of theory and policy considering broad based taxes consumption and income this paper shows that both savings and risk taking may be discouraged or left unchanged by proportional taxation with full loss offsets the analysis is carried out in a simple two period model of asset and consumption allocation these results are in sharp contrast to the standard result obtained in pure portfolio choice theory the author further shows that a wealth tax may be construed as a prepayment version of the cash flow consumption tax compared with the latter the wealth tax led to lower savings but a riskier portfolio

trading as gambling this paper offers evidence from three different samples consistent with investors substituting between playing the lottery and gambling in financial markets in the united states increases in the jackpots of the multistate lotteries powerball and mega millions are associated with significant reductions in small trade participation in the stock market california based discount brokerage clients and german discount brokerage clients are significantly less likely to trade during weeks with larger lottery prizes in the california and german lotteries respectively variation in lottery prizes affects speculative trading in more lottery like securities such as individual stocks and options but not trading in bonds and mutual funds trading that is likely associated with long term savings motives such as trading in retirement accounts does not respond to lottery jackpots either the negative relation between trading activity and jackpots is stronger for individuals who are more likely to play the lottery this paper was accepted by brad barber finance

wealth and portfolio composition theory and evidence we examine a survey of 6010 u s households and estimate a model for household portfolio allocation we extend the conventional portfolio choice model in order to capture the observed incompleteness of household portfolios we show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching we go on to examine the impact of taxes on portfolio composition using detailed survey data to calculate precisely the marginal tax rate facing each household finally we estimate wealth elasticities of demand for a range of assets and liabilities

platform competition in two sided markets many if not most markets with network externalities are two sided to succeed platforms in industries such as software portals and media payment systems and the internet must get both sides of the market on board accordingly platforms devote much attention to their business model that is to how they court each side while making money overall this paper builds a model of platform competition with two sided markets it unveils the determinants of price allocation and end user surplus for different governance structures profit maximizing platforms and not for profit joint undertakings and compares the outcomes with those under an integrated monopolist and a ramsey planner jel l5 l82 l86 l96

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

intermarket sweep order trade size clustering around corporate announcements investors have different trade size preferences depending on their information advantage using intermarket sweep orders isos we find that investors appear to prefer using small round lot trade

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

order characteristics and stock price evolution an application to program trading abstract this paper is an econometric analysis of the information content of automated orders arriving at the nyse the model captures the joint behavior of automated orders and also the return on the stock index future and the futures spot basis the results indicate that orders contain information useful in predicting stock returns beyond the information contained in the reported trades furthermore program and index arbitrage orders contain information beyond that available from the futures return and basis suggesting that these orders are not merely passive conveyors of common factor information nonprogram program and index arbitrage orders have roughly similar price impacts

the optimal size of a bank costs and benefits of diversification abstract this paper provides a theory of diversification and financial structure of banks it shows that by diversifying the bank portfolio and financing it with debt the bank can commit to a higher level of monitoring by linking the benefits of diversification to the costs the paper derives an optimal size of the bank which is bounded the costs of diversification lie in the higher overload costs with which the banker is faced by monitoring more projects the benefits of diversification lie in increasing the bank s owner s incentives to monitor the lenders

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

bertrand competition for inputs and walrasian outcomes market making by merchants who obtain stock from suppliers and resell it to con sumers is modeled as a two stage pricing game with winner take all c ompetition for the inputs in contrast to fixed capacity models the re is a unique subgame perfect nash equilibrium spne which is walr asian for elastic demand and non walrasian for inelastic demand alte rnatively when merchants first sell forward contracts to consumers a nd then compete for supplies the unique spne is always walrasian th us the author has an equilibrium model in which walrasian price aris es not from the benevolent actions of a fictitious auctioneer but fr om optimal price setting behavior of merchants copyright 1988 by american economic association

equilibrium selection inn person coordination games abstract this paper investigates several approaches to equilibrium selection and the relationships between them the class of games we study are n person generalized coordination games with multiple pareto rankable strict nash equilibria the main result is that all selection criteria select the same outcome namely the risk dominant equilibrium in two person games and that most equivalences break for games with more than two players all criteria select the pareto efficient equilibrium in voting games of which pure coordination games are special cases journal of economic literature classification numbers c70 c72 d82

competition for scarce resources we model a downstream industry where firms compete to buy capacity in an upstream market which allocates capacity efficiently although downstream firms have symmetric production technologies we show that industry structure is symmetric only if capacity is sufficiently scarce otherwise it is asymmetric with one large fat capacity hoarding firm and a fringe of smaller lean capacity constrained firms as demand varies the industry switches between symmetric and asymmetric phases generating predictions for firm size and costs across the business cycle surprisingly increasing available capacity can cause a reduction in output and consumer surplus by resulting in such a switch

the strategic analysis of intermediation the importance and the special character of intermediation were recognized as early as in the eighteenth century and have been stressed by many authors afterwards in spite of this long tradition comparatively little work has been done on the details of the economic theory of intermediation instead it was assumed that intermediation can simply be treated like any other economic activity in contrast i will argue that the theory of intermediation requires a specific game theoretic analysis and moreover that many preconceptions that one might have on the basis of standard microeconomic theory are wrong

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

competition among trading venues information and trading on electronic communications networks this paper explores the competition between two trading venues electronic communication networks ecns and nasdaq market makers ecns oier the advantages of anonymity and speed of execution which attract informed traders thus trades are more likely to occur on ecns when information asymmetry is greater and when trading volume and stock return volatility are high ecn trades have greater permanent price impacts and more private information is revealed through ecn trades than though market maker trades however ecn trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and oier them better executions technological innovations that enable high speed low cost electronic trading systems are dramatically changing the structure of nancial markets exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems trading volume on electronic communications networks ecns has grown rapidly over the past several years ecns are now involved in more than a third of nasdaq trading volume and are attempting to increase their market share in nyse listed

how well does the weighted price contribution measure price discovery abstract the weighted price contribution wpc is a popular measure for price discovery this paper examines the theoretical properties and empirical performance of the wpc in sequential markets the benchmark used to judge the wpc is the information share is measure based on the variation of the efficient price we derive the asymptotic value of the wpc which is a complex combination of the unconditional means and variances of the returns of sequential markets under the assumption of normality we show that the wpc correctly converges to the is only when the returns are uncorrelated with zero means our theoretical predictions based on normality hold well in simulations and in empirical analyses of the overnight price discovery for the s p 100 index and its constituent stocks as the correlation between overnight and daytime returns increases the wpc deviates from the is substantially

banks as coordinators of economic growth and stability microfoundation for macroeconomy with externality abstract competition among banks promotes growth and stability for an economy with production externality following arrow and debreu 1954 6 i formulate a standard growth model with externality a two period version of romer 1986 39 as a game among consumers firms and intermediaries the walrasian equilibrium with an auctioneer does not achieve the social optimum without an auctioneer or intermediaries i show that no nash equilibrium exists with several banks strategically intermediating capital a nash equilibrium emerges with a realistic institution i e an interbank market with a negotiation process in the loan market the equilibrium outcome is uniquely determined and socially optimal

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

the existence of mixed strategy equilibria in a price setting oligopoly with convex costs this paper shows that a mixed strategy equilibrium will exist in an industry producing a homogeneous product with perfectly informed consumers if firms are identical and have weakly convex costs this generalises an earlier result by dasgupta and maskin

evolution in economic games abstract this paper examines the conditions under which evolutionary processes select equilibrium strategies of agents or firms under plausible dynamics optimal selection takes place provided that economic agents are small relative to the environment that is each such agent has a negligible effect on others payoffs however when this assumption is not met survival need not imply optimality examples in the contexts of bargaining bidding and market competition are presented

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

stealth trading which traders trades move stock prices usingaudit trail data for a sample of nyse firms we show that medium size trades are associated with a disproportionately large cumulative stock price change relative to their proportion of all trades and volume this result is consistent with the predictions of barclay and warner s 1993 stealth tradinghypothesis we find that the source of this disproportionately large cumulative price impact of medium size trades is trades initiated by institutions this result is robust to various sensitivity checks our findings appear to confirm street lore that institutions are informed traders 2001 elsevier science s a all rights reserved

order imbalance liquidity and market returns traditionally volume has provided the link between trading activity and returns we focus on a hitherto unexplored but intuitive measure of trading activity the aggregate daily order imbalance on the new york stock exchange signed order imbalances increase decrease following market declines rises which reveals that investors are contrarians on aggregate order imbalances in either direction either excess buy or sell orders reduce liquidity market wide returns are strongly affected by contemporaneous and lagged order imbalances market wide returns reverse themselves after high negative imbalance large negative return days the magnitude of this reversal is partially predictable from the level of the imbalance and return even after controlling for aggregate market volume and liquidity market returns are affected by order imbalance

reach for the stars a strategic bidding game we examine two sided competition in a duopoly market for differentiated products downstream the two firms compete in prices upstream they compete in bidding to hire talent input and there is one unique superstar the outcome depends on the downstream effect of only one firm employing the superstar when this intensifies downstream competition both firms are worse off than they would be if no superstar talent were available when the hiring of the superstar softens downstream competition both firms benefit but a winner s curse emerges in which the firm winning the superstar talent earns less profit than its rival

banking competition and market efficiency this paper analyses competition among financial intermediaries in a set up where financial intermediaries economize on duplicated monitoring diamond 1984 we analyse two different games in which both direct trade and indirect trade are available we show that in general equilibrium outcomes are inefficient so that diamond s efficiency result is fragile intermediation may increase rather than decrease transaction costs disintermediation may also be an equilibrium we discuss the role played by the nonconvexities of banks technology and that played by competition for deposits and loans

market making oligopoly this paper analyzes price competition between market makers who set costly capacity constraints before they intermediate between producers and consumers the unique equilibrium outcome with pure strategies at the capacity stage is the cournot outcome the paper thus provides a rationale for cournot type competition between market makers this contrasts with previous findings in the literature where due to the absence of capacity constraints that are set ex ante the bertrand result typically obtains

financial opening deposit insurance and risk in a model of banking competition abstract we study the impact of competition on banks risk taking behavior under different assumptions about deposit insurance and the dissemination of information while financial opening increases banks riskiness a risk based deposit insurance or alternatively the public disclosure of financial information are likely to mitigate this effect moreover the limiting cases of uninsured but fully informed depositors and risk based full deposit insurance yield the same equilibrium risk level although the welfare consequences of increased competition depend on its impact on risk financial opening unambiguously improves welfare as we approach the limiting cases

distilling liquidity costs from limit order books abstract this paper proposes a method to compute ex ante trading costs at the intraday level from limit order books using nearly 500 of the largest traded companies in the nyse arcabook we show that these costs have nontrivial intraday dynamics are negatively related to volume and positively related to volatility when ex ante trading costs are incorporated into price impact specifications the results show that this measure provides relevant information about price changes of the market at a high frequency level our evidence suggest that ex ante trading costs constitute a new source of information for the study of intraday liquidity

taxation uncertainty and the choice of a consumption tax base abstract several observers have concluded that the equivalence between the cash flow and wage tax approaches to direct consumption taxation breaks down in the presence of uncertainty as individuals with extraordinarily large gains are treated too generously under the latter approach in particular ahsan journal of public economics 1989 40 99 134 canadian journal of economics 1990 23 408 433 contends that equivalence obtains only if returns in excess of a safe rate of return are included in the wage tax base this paper constructs an alternative and arguably more plausible model under which full equivalence between the two approaches obtains even in the presence of uncertainty it also derives ahsan s result in a more general context and demonstrates that the divergence between the two analyses is attributable to different assumptions regarding the cost to the government of an uncertain revenue stream

the role of interbank markets in monetary policy a model with rationing the empirical research on monetary transmission has reported a number of puzzles challenging extant theoretical models of the transmission mechanism in this paper we argue that asymmetric information in the interbank market may be important to have a better understanding of the mechanisms at work in the transmission process we show that asymmetric information may induce an equilibrium with rationing this in turn has two major implications first it reconciles the apparent irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy magnitude puzzle and second it shows that this impact will not be limited to short term credit supply but will also affect long term lending even if the corresponding interest rate is unaffected composition puzzle

trade size order imbalance and the volatility volume relation abstract this paper examines the roles of the number of trades size of trades and order imbalance buyer versus seller initiated trades in explaining the volatility volume relation for a sample of nyse and nasdaq stocks our results reconfirm the significance of the size of trades beyond that of the number of trades in the volatility volume relation on both markets after controlling for the return impact of order imbalance the volatility volume relation becomes much weaker for nyse stocks the order imbalance in large trade size categories affects the return more than in smaller size categories for nasdaq stocks the largest return impact comes from the order imbalance in maximum sized small order execution system soes trades

private money and banking regulation we show that the regulation of lending practices is desirable for the optimal provision of private money in an environment in which bankers cannot commit to repay their creditors neither an unregulated banking system nor a form of narrow banking in which banks hold 100 in reserves can provide the socially efficient amount of money if bankers provided such an amount then they would prefer to default on their liabilities we show that a regulation that increases the value of the banking sector s assets e g by limiting competition in credit markets will mitigate the commitment problem if the return on the banking sector s assets is made sufficiently large then it is possible to implement an efficient allocation

what s not there odd lots and market data we investigate odd lot trades in equity markets odd lots are increasingly used in algorithmic and high frequency trading but are not reported to the consolidated tape or in databases such as taq in our sample the median number of odd lot trades is 24 but in some stocks odd lots are 60 or more of trading odd lot trades contribute 35 of price discovery consistent with informed traders using odd lots to avoid detection omitting odd lot trades leads to inaccuracies in order imbalance measures and makes sentiment measures unreliable excluding odd lots from the consolidated tape raises important regulatory issues

an analysis of trade size clustering and its relation to stealth trading abstract nyse and nasdaq trades increasingly cluster on multiples of 500 1 000 and 5 000 shares such clustering varies over time and across stocks and tends to increase with the level of trading activity furthermore rounded trades tend to have more persistence both in occurrence and in trade initiation finally medium sized rounded trades tend to have greater relative price impact than large rounded trades from these observations we surmise that trade size clustering is consistent at least in part with the actions of stealth traders who tend to use medium sized rounded transactions in an attempt to disguise their trades

an approach to equilibrium selection abstract we consider equilibrium selection in 2 2 bimatrix both symmetric and asymetric games with two strict nash equilibria by embedding the static games in a dynamic random matching framework played by a continuum of anonymous agents unlike in evolutionary games the players are rational and maximize discounted payoffs but they are restricted to make a short run commitment when choosing actions this dynamic game with frictions has stationary states which correspond to the nash equilibria of the static game our selection is based on differential stability properties of the stationary states it is shown that for a small degree of friction a strict nash equilibrium becomes uniquely absorbing and globally accessible if and only if it is risk dominant harsanyi and selten a general theory of equilibrium selection in games mit press cambridge ma 1988 journal of economic literature classification numbers c72 and c73