an investigation of market microstructure impacts on event study returns we investigate the importance of bid ask spread induced biases on event date returns as exemplified by seasoned equity offerings by nyse listed firms we document significant negative return biases on the offering day which explain a large portion of the negative event date return documented in the literature buy sell order flow imbalance is prominent around the offering and induces a relatively large spread bias if order imbalances are suspected the researcher can use returns calculated from the midpoint of the closing bid and ask quotes instead of returns calculated from closing transaction prices to avoid this return bias several studies document the impact of bid ask spreads on security return patterns which appear inconsistent with the informational efficiency of capital markets phillips and smith 1980 find spread induced bias to be important in explaining apparent arbitrage opportunities in the option markets lakonishok and smidt 1984 uncover evidence suggesting a relation between bid ask spreads and turn of the year seasonality in stock returns 1 keim 1989 and porter 1989 further document the empirical importance of

spillovers through banking centers a panel data analysis of bank flows abstract this paper presents evidence that spillovers through bank lending contributed to the transmission of currency crises during the recent episodes of financial instability in emerging markets the innovation of the paper is that it looks beyond aggregated measures of contagion into the structure of bank flows disaggregating by banking centers the main findings are that spillovers caused by banks exposures to a crisis country help predict flows in third countries after the mexican and asian crises but not after the russian crisis in the latter there is evidence of a generalized outflow from emerging markets the importance of spillovers through banking centers suggests that countries might reduce contagion risk by diversifying the sources of their financing and by carefully monitoring borrowing from creditors exposed to potential crisis countries

intraweek and intraday trade anomalies evidence from forex market in this article we search for the evidence of intraweek and intraday anomalies on the spot foreign exchange forex market having in mind the international scope of this market empirical evidence against market efficiency i e market anomalies will have important consequences for the substantial number of forex investors all around the globe we explore intraweek intraday and interaction between days and hour trade anomalies on the forex market over the period of 10 years using hourly time series data of euro and us dollar eur usd exchange rate on swiss forex market from 1 january 2004 to 11 january 2014 we compare by analysis of variance test all pairs of mean returns on a daily hourly and daily hourly basis t test is used to test whether intraday returns are significantly different from zero we employ tukey s honestly significant difference test to explore which intraday pairs of hourly mean returns are significantly greater than zero we find that intraday and interaction between day and ho

exchange rate risk and the bid ask spread a seven country comparison this paper studies the determination of exchange market transaction costs using a large data set including seven currencies it provides empirical support for the theoretical prediction of a positive relationship between the level of uncertainty regarding future prices and current transaction costs in contrast to most previous work it considers explicitly the problem of omitted transactions volume showing that while estimators are less efficient and potentially inconsistent in the absence of the unavailable variable the direction of potential coefficient bias is such that hypothesis tests regarding the importance of uncertainty are rendered more conservative

international financial contagion in currency crises abstract this paper examines the role of financial linkages especially through a common creditor in the propagation of emerging market crises during the 1990s using panel probit regressions on 41 emerging market countries it finds that financial linkages played a significant role in the spread of the mexican asian and russian crises the significance of financial linkages emerges after controlling for the role of domestic and external fundamentals trade spillovers and financial weaknesses in the affected countries a strong financial linkage to the crisis country of origin not only substantially raises the probability of contagion but also helps to explain the observed regional concentration of currency crises

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

how has the euro changed the foreign exchange market this paper examines the primary forex statistics for the euro in relation to the german mark prior to 1999 contrary to widespread expectations our evidence indicates that the euro lost ground against the us dollar in forex spot trading and in some dimensions does not even match the international transaction role of the german mark we argue that the euro changed the forex market structure and particularly increased market transparency through currency elimination the higher market transparency exposes the dealers to higher inventory risk as his inventory imbalances are revealed more easily to other dealers dealers in the euro markets recover increased inventory costs through higher spreads that make the euro a less attractive transaction medium than the german mark we explore the policy implications for the ecb for euro outsiders and reflect upon the future of the forex market

the role of portfolio constraints in the international propagation of shocks we study the comovement among stock prices and exchange rates in a three good three country centre periphery dynamic equilibrium model in which the centre s agents face portfolio constraints we characterize equilibrium in closed form for a broad class of portfolio constraints solving for stock prices terms of trade and portfolio holdings we show that portfolio constraints generate wealth transfers between the periphery countries and the centre which increase the comovement of the stock prices across the periphery we associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion the model generates predictions consistent with other important empirical results such as amplification and flight to quality effects copyright 2008 wiley blackwell

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

bid ask spreads in the interbank foreign exchange markets abstract this study provides evidence on quotations and bid ask spreads in the wholesale foreign exchange market and introduces a method to document variation in the placement of quotes relative to asset value i find that spreads widen with proxies for inventory carrying costs including forecasts of price risk and a measure of liquidity costs increases in spreads before nontrading periods can also be attributed to inventory costs the location of currency quotes in relation to value is not constant and the outcome of hypothesis tests regarding changes in currency value can be sensitive to allowances for variation in quote location

segmentation and time of day patterns in foreign exchange markets abstract this paper sheds light on a puzzling pattern in spot foreign exchange markets domestic currencies appreciate depreciate systematically during foreign domestic working hours this phenomenon spans many years and several exchange rates and overrides calendar effects we argue that it is mainly due to liquidity and inventory patterns that emerge from the combination of two factors domestic agents tend to be net buyers of foreign currency and to trade mostly in their country s working hours the prevalence of domestic foreign traders demanding the counterpart currency during domestic foreign working hours implies sell price buy price pressure on the domestic currency during domestic foreign working hours

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

financial crises and the composition of cross border lending abstract we examine the composition and drivers of cross border bank lending between 1995 and 2012 distinguishing between syndicated and non syndicated loans we show that on balance sheet syndicated loan exposures which account for almost one third of total cross border loan exposures increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis our empirical analysis of the drivers of cross border loan exposures in a large bilateral dataset leads to three main results first banks with lower levels of capital favor syndicated over other kinds of cross border loans second borrower country characteristics such as level of development economic size and capital account openness are less important in driving syndicated than non syndicated loan activity suggesting a diversification motive for syndication third information asymmetries between lender and borrower countries became more binding for both types of cross border lending activity during the recent crisis

liquidity management of u s global banks internal capital markets in the great recession abstract the recent crisis highlighted the importance of globally active banks in linking markets one channel for this linkage is through how these banks manage liquidity across their entire banking organization we document that funds regularly flow between parent banks and their affiliates in diverse foreign markets we show that parent banks when hit by a funding shock reallocate liquidity in the organization according to a locational pecking order affiliate locations that are important for the parent bank revenue streams are relatively protected from liquidity reallocations in the organization while traditional funding locations are more extensively used to buffer shocks to the parent bank balance sheets

execution costs and their intraday variation in futures markets we consider trading costs in the transparent competitive open outcry markets of the chicago mercantile exchange cme in which market makers have no affirmative obligation to trade we document that while cme spreads are similar in magnitude to those in other markets realized spreads are often negative a plausible explanation is that cme market makers are able to employ more complex trading strategies than their equity market counterparts because they are not bound by affirmative obligation the evidence suggests that market transparency and market maker obligations are important determinants of intraday variation in trading costs copyright 2001 by university of chicago press

what do economists tell us about venture capital contracts venture capital markets are characterized by multiple incentive problems and asymmetric information in an uncertain environment all kinds of agency problems are present moral hazard adverse selection hold up problems window dressing etc entrepreneurs and venture capitalists enter into contracts that influence their behavior and mitigate the agency costs in particular they select an appropriate kind and structure of financing and specify the rights as well as the duties of both parties the typical features of venture capital investments are an intensive screening and evaluation process an active involvement of venture capitalists in their portfolio companies a staging of capital infusions the use of special financing instruments such as convertible debt or convertible preferred stock syndication among venture capitalists or a short investment horizon

the intraday bid ask spread behaviour of the jpy usd exchange rate in the ebs electronic brokerage system using a sophisticated tool of the periodic generalized autoregressive conditional heteroscedastic p garch model this article investigates the market institutional effects of the determining role of trading activities and exchange rate volatility on the intraday behaviour of the 15 minute jpy usd exchange rate bid ask spreads in the electronic broking service ebs of electronic brokerage market for the period from 1 january 2003 to 31 december 2005 we find that the exchange rate volatility both significantly and positively affects the bid ask spreads while the number of deals and quotation changes negatively affect the bid ask spreads these results are similar to those of past studies we also find that a u shaped pattern exists in the tokyo trading hours and an inverted u shaped pattern in the london trading hours in addition to a round clock inverted u shaped pattern of spread volatility this inverted u shaped pattern may be caused by unexpected news arrivals the spread behaviour of the ebs glo

relative risk aversion and the transmission of financial crises we study how investor behavior affects the transmission of financial crises if investors exhibit decreasing relative risk aversion then negative wealth shocks increase the risk premium required to hold risky assets we integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals investor behavior can be a transmission channel of financial crises as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker the feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely the possible stabilization effects of capital controls and a tobin tax on the international transmission of financial crises are also studied

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

global banking global crises the role of the bank balance sheet channel for the transmission of financial crises abstract we examine whether shocks to leveraged creditors with cross border holdings have an incidence on debtor countries risk of suffering financial turmoil we construct a new proxy of shocks to international banks balance sheets using credit ratings and the structure of their international assets this allows us investigating the effect of foreign bank balance sheet shocks on domestic financial turmoil in a large sample of 146 developed and emerging economies from 1984 to 2011 our proxies of shocks towards bank balance sheets are strong predictors of systemic banking crises in their debtor countries confirming these results bilateral bank flows significantly decrease when creditor banks assets are hit by negative shocks as measured by credit rating downgrades from third party countries short term liabilities towards global banks appear to increase roll over and funding risks thereby amplifying the impact of shocks to foreign lenders balance sheets domestic banking sectors vulnerabilities such as illiquid assets and a low deposit asset ratio are found to increase crisis contagion risk in contrast a high level of global liquidity attenuates the transmission of shocks to international banks assets to debtor countries

macroeconomic news order flows and exchange rates under rational expectations and efficient markets the news contained in public information announcements is directly impounded into prices with there being no role for trades in this process of information assimilation this paper directly tests this assertion using transaction level exchange rate data and a sample of scheduled macroeconomic announcements the main result of the paper is that even information that is publicly and simultaneously released to all market participants is largely impounded into prices via the key micro level price determinant order flow we quantify the role that order flow plays and find that between a half and two thirds of price relevant information is incorporated into prices via the trading process

exchange rate risk and transactions costs evidence from bid ask spreads abstract this paper develops a model of exchange rate bid ask spreads which is used to examine the relationship between exchange rate risk and volatility and to measure transactions costs the empirical results indicate that market makers judge the probability of exchange rate changes based on both recent and long term volatility and that the second moment alone is not a complete measure of volatility while a proxy for trading volume does not have the expected relationship with spreads weekend and holiday effects conform to theory transactions costs vary over time and seem responsive to the imposition of exchange controls

futures trading activity and stock price volatility we examine whether greater futures trading activity volume and open interest is associated with greater equity volatility we partition each trading activity series into expected and unexpected components and document that while equity volatility covaries positively with unexpected futures trading volume it is negatively related to forecastable futures trading activity further though futures trading activity is systematically related to the futures contract life cycle we find no evidence of a relation between the futures life cycle and spot equity volatility these findings are consistent with theories predicting that active futures markets enhance the liquidity and depth of the equity markets

optimal bank reorganization policies and the pricing of federal deposit insurance optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits and interest rate on deposits the economy s risk free interest rate and the regulators bank audit administration costs under competitive conditions the threshold assets to deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank s risk on investment and nonincreasing in the bank s current assets to deposits ratio should regulatory agencies close reorganize an ailing federally insured financial institution if so when the recent record rate of failures of savings and loans associations s ls has renewed the urgency of this question the regulatory agencies are empowered but not required to reorganize financial institutions that are statutorily insolvent i e have zero or negative regulatory net worth recently regulators have in many instances permitted insolvent financial institutions to remain in operation 2 also while debating on the increase of the proposed funding of the federal deposit insurers the u s congress argued whether it would be desirable and if so when to close more s ls thus when regulators should close a troubled financial institution has become a major question of bank regulatory policy while the existing academic literature provides powerful insights into the structure and pricing of the insurers liability this literature offers very little guidance regarding the timing of bank reorganizations 3 indeed to the best of our knowledge the value of the federal

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

regionality revisited an examination of the direction of spread of currency crises abstract what determines the direction of spread of currency crises we examine data on waves of currency crises in 1992 1994 1997 and 1998 to evaluate several hypotheses on the determinants of contagion we simultaneously consider trade competition financial links and institutional similarity to the ground zero country as potential drivers of contagion to overcome data limitations and account for model uncertainty we utilize bayesian methodologies hitherto unused in the empirical literature on contagion in particular we use the bayesian averaging of binary models that allows us to take into account the uncertainty regarding the appropriate set of regressors we find that institutional similarity to the ground zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset we thus provide persuasive evidence in favour of the wake up call hypothesis for financial contagion trade and financial links may also play a role in determining the direction of contagion but their importance varies amongst the crisis periods

the long run uncovered interest rate parity in view of a trading strategy uncovered interest rate parity uip states that bonds in different denomination should produce the same returns if the maturities of the bonds are the same given this if a foreign bond produces a lower holding period return than a home bond of the same maturity for their remaining lives the same foreign bond ought to produce a return higher than the home bond a test is designed according to this relationship with 1 to 6 year interest rate data of u s britain and germany from 1979 to 2005 our test shows that this relationship is more reliable for 6 year interest rates than the shorter rates in general this result lends support to the long run uip a trading strategy is developed by utilizing this idea we show that positive returns can be achieved by the strategy for bonds of longer horizons this result also serves as indirect evidence of the long run uip

when in peril retrench testing the portfolio channel of contagion abstract the impact of past gains and losses on international investors risk aversion is an important factor in the propagation of financial shocks across countries we first present a stylized model illustrating how changes in investors risk aversion affect portfolio decisions and stock prices we then examine empirically the behavior of international mutual funds when funds returns are below average they reduce their exposure to countries in which they were overweight and vice versa an index of financial interdependence that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises

the extension of international credit by us banks a disaggregated analysis 1988 1994 abstract we use simultaneous equation estimation techniques to analyze decisions made by 35 us banks with respect to credit extended domestically and to credit extended within 16 foreign countries 1988 1994 our results indicate that foreign credit extension by us banks follows the commercial expansion of us businesses abroad and is greater in countries with expanding economies they are inconsistent with the notion that banks trade off credit activities undertaken domestically and abroad

foreign bank behavior during financial crises one of the persistent policy problems faced by governments contemplating financial liberalizations is the question of whether to allow foreign banks entry into the domestic economy this question has become ever more urgent in recent times due to rapid financial globalization coupled with the credit contractions experienced as a result of the 2007 08 financial crisis this paper examines the question of whether opening the financial sector to foreign participation is a good idea for developing countries using a unique bank level database of foreign ownership in particular the authors examine whether the credit supply of majority foreign owned financial institutions differ systematically conditional on a crisis event in their home economies they show that foreign banks that were exposed to crises in their home countries exhibit changes in lending patterns that are lower by between 13 and 42 percent than their non crisis counterparts

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

market microstructure effects of government intervention in the foreign exchange market as asymmetric information model of the bid ask spread is developed for a foreign exchange market subject to occasional government interventions traditional tests of the unbiasedness of the forward rate as a predictor of the future spot rate are shown to be inconsistent when the rates are measured as the average of their respective bid and ask quotes larger bid ask spreads on fridays are documented reliable evidence of asymmetric bid ask spreads for all days of the week albeit more pronounced on fridays are presented the null hypothesis that the forward rate is an unbiased predictor of the future spot rate continues to be rejected the regression slope coefficients increase toward unity however indicating a less variable risk premium