variations in trading volume return volatility and trading costs evidence on recent price formation models patterns in stock market trading volume trading costs and return volatility are examined using new york stock exchange data from 1988 intraday test results indicate that for actively traded firms trading volume adverse selection costs and return volatility are higher in the first half hour of the day this evidence is inconsistent with the admati and pfleiderer 1988 model which predicts that trading costs are low when volume and return volatility are high interday test results show that for actively traded firms trading volume is low and adverse selection costs are high on monday which is consistent with the predictions of the foster and viswanathan 1990 model academics investors and regulators alike are now intensively focused upon understanding the volatility of asset returns and its relation to trading volume this interest was undoubtedly piqued by the market break of october 1987 a time during which volatility and trading volume reached unprecedented levels but even beforehand researchers observed regular differences in the return process for various hours of the day and days of the week research concerning temporal patterns in stock market volatility and volume falls in two groups studies that document observed patterns and studies that develop models to predict patterns among the studies in the first group are oldfield and rogalski 1980 french and roll 1986 stoll and whaley 1990 harris 1986 and wood mcinish and ord 1985 who report evidence on seasonalities in daily and weekly return variances among the regularities that have been documented using interday data is that volatility is higher when the market is open than when it is closed oldfield and rogalski 1980 french and roll 1986 and stoll and whaley 1990 for example point out significant differences in return volatility between trading

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

does fiscal policy matter tax transfer and spend in a macro abm with capital and credit we investigate compare and contrast the emerging properties of a macroeconomic agent based model along the lines of assenza et al 2015 journal of economic dynamics and control 50 5 28 when the government experiments with different policy configurations i tax and transfer ii tax transfer and spend and iii the implementation of a fiscal rule such as a stylized stability and growth pact in some of the scenarios considered a remarkable property can be detected which we label the balanced budget emerging property the scale of activity in the aggregate gdp employment and unemployment rate is such that a balanced budget emerges spontaneously the strong implication of this property is that the fiscal authority is able to target gdp and the unemployment rate a result reminiscent of the blinder solow framework it is worth noting however that there are many departures from the rule which we have detected by carrying out the sensitivity analysis

quantifying and understanding the economics of large financial movements abstract financial market data offer the exciting possibility of quantifying and understanding the physics of a complex dynamical system and the hope that this line of thinking may give some insights into understanding collective human behavior various measures of stock market activity have been found to exhibit puzzling features that have recently attracted much research attention these features include the power law distributions of return volume number of trades assets under management of trading institutions and other power law relations linking them here we review these empirical results and show that some of these findings can be usefully interpreted within the framework of a reduced form model gabaix x gopikrishnan p plerou v stanley h e 2003 a theory of power law distributions in financial market fluctuations nature 423 267 270 and an economic model gabaix x gopikrishnan p plerou v stanley h e 2006b institutional investors and stock market volatility quarterly journal of economics 121 461 504 the features not only present a challenge to models of market fluctuations but their specific power law nature also suggests new modeling directions which include ideas from statistical physics which proved useful in understanding similar relationships that occur in the physics of critical phenomena

x efficiency and economies of scale in pension fund administration and investment pension funds operating costs impair pension benefits so it is crucial for pension funds to operate at the lowest cost possible in practice we observe substantial differences in costs per member for dutch pension funds both across and within pension fund size classes this article presents new estimates of scale economies of pension funds and is the first that also measures pension fund x inefficiency we use a unique supervisory data set which distinguishes between administrative and investment costs and apply various approaches and models our estimates show large economies of scale for pension fund administrations but modest diseconomies of scale for investment activities we also found that many pension funds have substantial x inefficiencies for both administrative and investment activities the two kinds of inefficiency differ across types of pension funds therefore most pension funds should be able to improve their cost performance and hence increase pension benefits

a day end transaction price anomaly a large mean price change is observed on the last daily nyse transaction this suggests that closing prices may not consistently represent stock values transaction prices are studied to further characterize the day end price rise and to determine whether it is due to any limited subsample of stocks or dates the results indicate that the phenomenon is pervasive over most firms and days some evidence suggests that it is caused by a change in the frequency of ask prices at day end

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

fiscal policy and business cycle characteristics in a heterogeneous agent macro model abstract this paper explores the macroeconomic implications of changing fiscal policy in a heterogeneous interacting agent hia model the key contributions to the existing hia complex adaptive trivial system cats literature include the addition of a progressive income tax structure an expanded role for redistribution and a stylized reactive government sector in certain specifications deficit financed tax cuts are shown to effectively shorten recessions while deficit financed spending stimulus is able to lengthen recoveries alternative specifications provide ambiguous support for generalizing the effectiveness of these policy treatments robustness checks support the general findings that increased redistribution towards the unemployed results in higher unemployment rates greater inequality and shorter contractions

smooth trading with overconfidence and market power we describe a symmetric continuous time model of trading among relatively overconfident oligopolistic informed traders with exponential utility traders agree to disagree about the precisions of their continuous flows of gaussian private information with enough disagreement an equilibrium exists in which prices reveal the average of all traders signals immediately but traders continue to trade gradually towards target inventories the price is a linear function of a trader s inventory the derivative of a trader s inventory and the average other traders valuations prices reflect a keynesian beauty contest faster than equilibrium trading generates flash crashes jel d8 d43 d47 g02 g14

return autocorrelation and institutional investors abstract we propose and test the hypothesis that trading by institutional investors contributes to serial correlation in daily returns our results demonstrate that nyse particles and individual security daily return autocorrelationsare an increasing function of the level of institutional ownership moreover the results are consistent with the hypothesis that institutional trading reflects information and increases the speed of price adjustment the relation between autocorrelation and institutional holdings does not however apparent to be driven by market frictions or rational time varying required rates of return we conclude that institutional investors correlated trading patterns contribute to axial correlation in daily returns

the accuracy of the tick test evidence from the australian stock exchange abstract in the absence of information regarding whether a trade is buyer or seller initiated many researchers have employed the tick rule as a proxy these researchers have been supported in their endeavours by the work of lee and ready 1991 which suggests that the tick rule is 90 accurate unfortunately the difficulty of securing data on this issue has made lee and ready s paper somewhat unique in that there have been few attempts to confirm their result in us markets and no attempts in other markets the purpose of this work is to test the robustness of their result in the australian securities market using cleaner intra day data we mimic the lee and ready study to cast some doubt upon the robustness of their findings in different markets our results suggest an overall accuracy of approximately 74 as opposed to lee and ready s 90 however accuracy in excess of 90 is documented when zero ticks are excluded further analysis provides evidence that a volatile or trending market will decrease the accuracy of the tick rule it is also demonstrated that the tick rule is less likely to accurately classify seller initiated trades and small buyer initiated trades

upstairs market for principal and agency trades analysis of adverse information and price effects this paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost we find upstairs market makers effectively screen out information motivated orders and execute large liquidity motivated orders at a lower cost than the downstairs market upstairs markets do not cannibalize or free ride off the downstairs market in one quarter of the trades the upstairs market offers price improvement over the limit orders available in the consolidated limit order book trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market

the information content of institutional trades on the london stock exchange we construct a unique data set that includes all reported institutional block trades on the london stock exchange and analyze the market reaction to buy and sell trades we find that the type of investors behind the trade and the combination of the trade s size and the trader s resulting level of ownership are the major determinants of the information effects and the asymmetry between price impacts of buy and sell trades in particular large trades undertaken by fund managers the most active investors in our sample have strong information content while for the remaining trades we report limited support for the information and the price impact asymmetry hypotheses these results hold even after accounting for trade complexity and volatility effects in the regressions

does it pay to pay performance fees empirical evidence from dutch pension funds abstract we analyze the relation between investment returns and performance fees for 218 dutch occupational pension funds with an average total of 1090 billion euro in assets under management from 2012 to 2017 our dataset is free from self reporting biases and includes total return excess return and performance fees for six major asset classes we find no statistical evidence that the returns of pension funds that pay performance fees to asset managers for active investing are significantly higher or lower than the returns of pension funds that do not pay performance fees this is true for most asset classes and robust if we correct for risk we also document that large and more specialized pension funds pay less performance fees for a given level of excess return in alternative asset classes such as hedge funds and private equity this is possibly the result of better negotiation power due to their larger scale or higher level of expertise

why is equity order flow so persistent abstract order flow in equity markets is remarkably persistent in the sense that order signs to buy or sell are positively autocorrelated out to time lags of tens of thousands of orders corresponding to many days two possible explanations are herding corresponding to positive correlation in the behavior of different investors or order splitting corresponding to positive autocorrelation in the behavior of single investors we investigate this using order flow data from the london stock exchange for which we have membership identifiers by formulating models for herding and order splitting as well as models for brokerage choice we are able to overcome the distortion introduced by brokerage on timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding we also study the properties of brokerage order flow and show that it is remarkably consistent both cross sectionally and longitudinally

industrial dynamics fiscal policy and r d evidence from a computational experiment we present an agent based computational model in which bounded rational firms and workers trade on fully decentralized markets for final goods and labor by means of random matching protocols the model replicates several macroeconomic phenomena regularly observed in the data with aggregate features emerging from the localized interactions of individual entities the model is then used as a computational laboratory to run an experiment on the role of fiscal policy in increasing macroeconomic performance

smart fund managers stupid money we develop a model of mutual fund manager investment decisions near the end of quarters we show that when investors reward better performing funds with higher cash flows near quarter ends a mutual fund manager has an incentive to distort new invest ment toward stocks in which his fund holds a large existing position the short term price impact of these trades increase the fund s reported returns higher returns are rewarded by greater subsequent fund inflows which in turn allow for more investment distortion the next quarter because the price impact of trades is short term each subsequent quar ter begins with a larger return deficit eventually the deficit cannot be overcome thus our model leads to the empirically observed short run persistence and long run rever sal in fund performance in doing so our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance jel classification d82 g2 g14

mechanisms of funding for universal service obligations the electricity case abstract the transition towards a more competitive regime in network industries and specially in electricity sector raises the relevant question of funding for the universal service obligations usos our paper focuses on two ways of funding for universal service and equal treatment obligations ubiquity and nondiscrimination constraints und the funding through access charge cs regime or taxation t regime using a network model including competition between a historical monopoly in charge for the usos and an entrant we obtain some results concerning gains and losses of social welfare due to those mechanisms we show that most of the time it is socially better to let the historical monopoly be active whatever the type of funding for usos applying and whatever profitability of the firms is however when the entrant is active we can highlight that the introduction of the t regime compared to the cs one implies either welfare deterioration or an entry prevention strategy by the historical firm therefore the t regime could not be an argument for the regulator to promote vertical separation of the historical firm according to the european community line

market impact costs of institutional equity trades this article analyzes market impact costs of equity trading by one of the world s largest pension funds we find that on average these costs are small in terms of market disruption but substantial in terms of costs for the pension fund average market impact costs equal 20 basis points for buys and 30 basis points for sells furthermore we show that momentum and volatility have considerable influence on market impact costs other important determinants of these costs are trade type agency single or principal trade size trading strategy trading venue and industry sector additionally we find that the timing of trades plays a substantial role in explaining trading costs moreover we also establish a cost risk trade off the longer it takes to execute a trade the lower the expected market impact costs but the higher the volatility of these costs

economic freedom and the stability of stock prices a cross country analysis abstract this paper investigates the link between economic freedom and the price stability of individual securities in a unique setting using a sample of 327 american depositary receipts adrs we find an inverse relation between the economic freedom of a adrs home country and the price volatility of the adr this negative correlation is driven primarily by certain components of economic freedom such as property right protection the soundness of the money and the level of free trade in the home country further we find evidence that less regulation and less government control of markets in the home country leads to more stable adr prices

price regulation of access to telecommunications networks abstract without access of networks to each other competition in the telecommunications sector would hardly have spread so quickly such mutual access is necessary for carriers to provide ubiquitous service and enable endusers to call and be called by anybody without subscribing to a system wide monopolist one way access concerns bottleneck inputs provided by an incumbent network to entrants while two way access concerns the interconnection between networks whereas one way access regulation is exclusively driven by containment of market power two way access is additionally affected by collusion possibilities among the numerous pricing rules discussed none clearly dominates this article provides a roadmap vis a vis the competing policy objectives for access price regulation

derivative use fund flows and investment manager performance abstract prior literature which examines the use of derivatives by investment managers does not discern between different types of derivative trading strategies this study is the first to examine and gather data on a particular type of derivative trading strategy undertaken by investment managers we examine the extent to which equity fund managers use index futures to manage fund flows and the effect this has on their alpha and market timing measures of performance our results show that funds that do not use derivatives exhibit lower returns and negative market timing skills when they experience fund flow the performance of funds that use derivatives however is independent of investor s liquidity demands in fact the unconditional performance of the average user fund is statistically equivalent to the performance of the average non user fund conditional on zero fund flow our results provide evidence that derivatives can be beneficial for mutual fund holders under certain conditions

large block transactions the speed of response and temporary and permanent stock price effects abstract the paper investigates how quickly prices attain new equilibrium levels after large block transactions and measures the associated temporary and permanent price effects we find that prices adjust within at most three trades with most of the adjustment occurring in the first trade the temporary price effect for seller initiated transactions is related to block size but the temporary price effect observed for buyer initiated transactions is no larger than that observed in 100 share trades most of the price effect associated with block trades is permanent and is related to block size regardless of the initiating party

structural stochastic volatility in asset pricing dynamics estimation and model contest abstract in the framework of small scale agent based financial market models the paper starts out from the concept of structural stochastic volatility which derives from different noise levels in the demand of fundamentalists and chartists and the time varying market shares of the two groups it advances several different specifications of the endogenous switching between the trading strategies and then estimates these models by the method of simulated moments msms where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index in addition to the standard version of msm with a quadratic loss function we also take into account how often a great number of monte carlo simulation runs happen to yield moments that are all contained within their empirical confidence intervals the model contest along these lines reveals a strong role for a tamed herding component the quantitative performance of the winner model is so good that it may provide a standard for future research

the behavior of stock prices around institutional trades all trades executed by 37 large investment management firms from july 1986 to december 1988 are used to study the price impact and execution cost of the entire sequence package of trades that we interpret as an order we find that market impact and trading cost are related to firm capitalization relative package size and most importantly to the identity of the management firm behind the trade money managers with high demands for immediacy tend to be associated with larger market impact financial economists have long studied the equity trading process and its impact on stock prices much prior empirical research isolates individual trades and analyzes the behavior of the stock price around each trade see for example kraus and stoll 1972a holthausen leftwich and mayers 1987 1990 keim and madhavan 1991 petersen and umlauf 1991 hausman lo and mackinlay 1992 and chan and lakonishok 1993 evaluating the behavior of stock prices around trades provides a means of discriminating among various hypotheses as to the elasticity of the demand for stocks yields an estimate of the cost of executing trades and a measure of the liquidity of a market and permits tests of different models of the determination of quotes and transaction prices for many institutional investors however even a moderately sized position in a stock may represent a large fraction of the stock s trading volume accordingly an investment manager s order is often broken up into several trades it is often misleading therefore to consider an individual trade as the basic unit of analysis in the study of trading activity and its effects on prices this paper uses the record of trades executed by 37 large investment manage

identifying the interaction between stock market returns and trading flows of investor types looking into the day using daily data abstract this paper introduces a new method for identifying the simultaneity between returns and trading flows the proposed method enables us to identify the intraday interaction using daily data and provides measures of the information content of trading flows and their instantaneous response to public information and information revealed by market prices applying this method to daily data on investor types from the korea stock exchange we find significant intraday bi directional interaction between flows and returns and their latent common drivers altering some of the results of the previous literature based on cholesky assumptions thus we obtain a number of new insights concerning the behavior of investor types

asymmetric information financing constraints and investment the results of a number of theoretical papers lead to the hypothesis that financial variables affect capital sp ending because of asymmetric information in capital markets the auth ors review the relevant theory and test this hypothesis with a large sample of firm data the results show that financial variables such a s cash flow and interest expense add significant explanatory power to investment equations based on dale jorgenson s neoclassical model w ith a capm specification for the firm s cost of capital and a sales accelerator model the analysis therefore links recent theoretical work on capital markets to long standing empirical debates in the inv estment literature copyright 1987 by mit press

liquidity investment style and the relation between fund size and fund performance using stock transactions data along with detailed stockholdings for a comprehensive sample of u s actively managed equity mutual funds from 1993 to 2002 this paper empirically examines the effect of liquidity and investment style on the relation between fund size and fund performance consistent with chen hong huang and kubik 2004 i find a significant inverse relation between fund size and fund performance further this inverse relation is stronger among funds that hold less liquid portfolios the inverse relation between fund size and fund performance is also more pronounced among growth and high turnover funds that tend to have high demands for immediacy overall this paper s findings suggest that liquidity is an important reason why fund size erodes performance

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

dissecting the cycle a methodological investigation following burns and mitchell we define the cycle as a pattern in the level of aggregate economic activity an algorithm to locate turning points is developed as is a new measure of pro cyclicality a link between turning points and the moments of the series is established thereby providing the statistical foundation that burns and mitchell s work lacked using these tools we are able to dissect cycles in terms of the contributions made by trend growth volatility serial correlation and non linear effects we dissect several models and find little evidence that certain non linear effects are important to the nature of business cycles

determinants of portfolio performance in order to delineate investment responsibility and measure performance contribution pension plan sponsors and investment managers need a clear and relevant method of attributing returns to those

trading cost the critical link between investment information and results 1983 trading cost the critical link between investment information and results financial analysts journal vol 39 no 3 pp 39 44

optimal deleveraging with nonlinear temporary price impact abstract in this paper we first propose a portfolio management model where the objective is to balance equity and liability the asset price dynamics includes both permanent and temporary price impact where the permanent impact is a linear function of the cumulative trading amount and the temporary impact is a k th between 0 and 1 order power function of the instantaneous trading rate we construct efficient frontiers to visualize the tradeoff between equity and liability and obtain analytical properties regarding the optimal trading strategies in the second part we further consider an optimal deleveraging problem with leverage constraints it reduces to a non convex polynomial optimization program with polynomial and box constraints a lagrangian method for solving the problem is presented and the quality of the solution is studied

on the irrelevance of input prices for make or buy decisions this paper demonstrates that input prices need not reflect the costs of an efficient incumbent supplier in order to induce entrants to implement efficient make or buy decisions because of strategic downstream considerations entrants may always undertake efficient make or buy decisions regardless of the prices at which they are authorized to buy key inputs from incumbent suppliers

the costs and determinants of order aggressiveness abstract this paper examines the costs and determinants of order aggressiveness aggressive orders have larger price impacts but smaller opportunity costs than passive orders price impacts are amplified by large orders small firms and volatile stock prices to minimize the implementation shortfall the optimal strategy is to enter buy sell orders at the bid ask aggressive buy sell orders tend to follow other aggressive buy sell orders and occur when bid ask spreads are narrow and depth on the same opposite side of the limit book is large small aggressive buys are more likely than sells to be motivated by information

a direct test of methods for inferring trade direction from intra day data this study directly tests the ability of several competing methods to identify market buy and sell orders using intra day quote and trade prices and identifies factors that affect the accuracy of the methods lee and ready s 1991 algorithm performs about the same as the tick test but the performance of both methods is worse than expected the results show that the use of either algorithm to classify trades can lead to significantly biased estimates of effective spreads and signed volume but the tick test provides better estimates of effective spreads and signed volume than lee and ready s method i introduction the use of intra day prices in empirical studies of securities markets is increasingly common and studies frequently require trades be identified as buyer or seller initiated unfortunately most data sets do not identify trade direction methods have however been proposed that allow trade direction to be inferred from adjacent prices and quotes the accuracy of these methods and the implica tions for microstructure research are still unresolved issues in large part because trade direction is unobservable in most financial data sets this study directly tests the ability of several competing methods to iden tify market buy and sell orders using intra day quote and trade prices the tests are conducted using the torq database a unique data set the new york stock exchange makes available to researchers that contains information on trades quotes and orders using the tick tests and lee and ready s lr hereafter 1991 method to classify trades as buys or sells and comparing the results to the direction of the actual orders i directly test the accuracy of the classification algorithms the tests also identify the factors that affect the accuracy of the clas sification methods additional tests demonstrate that using these algorithms can lead to biased inferences in two of their most common applications estimating effective spreads and signed volume trading test results also show that the tick

optimal liquidation strategies and their implications abstract this paper studies optimal liquidation when the selling price depends on the rate of liquidation transaction time volume and the asset s intrinsic value a generic closed form solution for maximizing the discounted liquidation proceeds is derived to obtain financial insights three parametric specifications that proxy for increasingly realistic market conditions are examined in our framework maximizing liquidation proceeds and minimizing liquidity costs are equivalent the optimal strategies imply more rapid liquidations in less liquid markets we also show that volatility is stochastic when market liquidity is unpredictable

institutional investors and stock market volatility statement of responsibility on t p reads xavier gabaix parameswaran gopikrishnan vasiliki plerou h eugene stanley

in search of liquidity block trades in the upstairs and downstairs markets we analyze the ability of various market mechanisms to provide liquidity for large equity trades using data on 21 077 block transactions in dow jones stocks we find that the down stairs nyse floor market is a significant source of liquidity although negotiation in the informal upstairs market provides better execution than the downstairs market for large trades these differences are economically small we find however that upstairs markets are used by traders who can credibly signal that their trades are liquidity motivated thus upstairs markets allow trades that may not otherwise occur article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

trading and liquidity on the tokyo stock exchange a bird s eye view the trading mechanism for equities on the tokyo stock exchange tse stands in sharp contrast to the primary mechanisms used to trade stocks in the united states in the united states exchange designated specialists have affirmative obligations to provide continuous liquidity to the market specialists offer simultaneous and tight quotes to both buy and sell and supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions in contradistinction the tse has no exchange designated liquidity suppliers instead liquidity is provided through a public limit order book and liquidity is organized through restrictions on maximum price changes between trades that serve to slow down trading in this article we examine the efficacy of the tse s trading mechanisms at providing liquidity our analysis is based on a complete record of transactions and best bid and best offer quotes for most stocks in the first section of the tse over a period of 26 months we study the size of the bid ask spread and its cross sectional and intertemporal stability intertemporal patterns in returns volatility volume trade size and the frequency of trades and market depth based on the response of quotes to trades and the frequency of trading halts and warning quotes the trading mechanism for equities on the tokyo stock exchange tse stands in sharp contrast to the primary mechanisms used to trade stocks in the united states in the united states exchange designated specialists have affirmative obligations to provide continuous liquidity in the market and to maintain a private limit order book with the public s limit orders on the tse exchange designated intermediaries saitori log limit orders and match them to incoming market orders but provide no market making services in the united states specialists offer simultaneous and tight quotes to both buy and sell on the tse public limit orders constitute the available bids and offers in the united states specialists supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions 1 on the tse the market mechanism places limits on the magnitude of consecutive price

transactions volume and volatility we show that the positive volatility volume relation documented by numerous researchers actually reflects the positive relation between volatility and the number of transactions thus it is the occurrence of transactions per se and not their size that generates volatility trade size has no information beyond that contained in the frequency of transactions our results suggest that theoretical research needs to entertain scenarios in which 1 both the frequency and size of trades are endogenously determined yet 2 the size of trades has no information content beyond that contained in the number of transactions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the financial accelerator in an evolving credit network we model a credit network characterized by credit relationships connecting i downstream d and upstream u firms and ii firms and banks the net worth of d firms is the driver of fluctuations the production of d firms and of their suppliers u firms in fact is constrained by the availability of internal finance proxied by net worth to the d firms the structure of credit interlinkages changes over time due to an endogeneous process of partner selection which leads to the polarization of the network at the aggregate level the distribution of growth rates exhibits negative skewness and excess kurtosis when a shock hits the macroeconomy or a significant group of agents in the credit network a bankruptcy avalanche can follow if agents leverage is critically high in a nutshell we want to explore the properties of a network based financial accelerator

optimal portfolio liquidation with distress risk we analyze the problem of an investor who needs to unwind a portfolio in the face of recurring and uncertain liquidity needs with a model that accounts for both permanent and temporary price impact of trading we first show that a risk neutral investor who myopically deleverages his position to meet an immediate need for cash always prefers to sell more liquid assets if the investor faces the possibility of a downstream shock however the solution differs in several important ways if the ensuing shock is sufficiently large the nonmyopic investor unwinds positions more than immediately necessary and all else being equal prefers to retain more of the assets with low temporary price impact in order to hedge against possible distress more generally optimal liquidation involves selling strictly more of the assets with a lower ratio of permanent to temporary impact even if these assets are relatively illiquid the results suggest that properly accounting for the possibility of future shocks should play a role in managing large portfolios

liaisons dangereuses increasing connectivity risk sharing and systemic risk the recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises this paper shows that a financial network can be most resilient for intermediate levels of risk diversification and not when this is maximal as generally thought so far this finding holds in the presence of the financial accelerator i e when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent s subsequent performance through the reaction of the agent s counterparties 2012 elsevier b v all rights reserved

risk return preferences in the pension domain are people able to choose this paper presents new evidence for the netherlands on pension preferences and investor autonomy in the pension domain using a representative survey of about 1000 dutch citizens our main conclusions are the following risk aversion is domain dependent and highest in the pension domain the vast majority of respondents favours the currently dominant defined benefit pension system if offered a combined defined benefit defined contribution system the majority would like to have a guaranteed pension income of at least 70 of their net labour income self assessed risk tolerance and financial expertise are important individual explanatory variables of pension attitudes the average respondent considers himself financially unsophisticated and is reluctant to take control of retirement savings investment even when offered the possibility to increase expertise respondents who have chosen a relatively safe portfolio tend to switch to the riskier median portfolio when they are shown future income streams this again suggests that many respondents currently lack the skills to have investor autonomy over investment for retirement

financial stability at risk due to investing rapidly in renewable energy we present novel insights about effective energy policies using an agent based model the model describes relevant feedback mechanisms between technological evolution the interbank market and the electricity sector analysis with it shows that energy policies affect interbank connectivity and hence the likelihood of cascades of bank failures this effect has not been studied before in the literature in particular we find that investments in renewable energy reduce interbank connectivity increasing the probability of bank failures while raising taxes on energy has an opposite effect increasing the share of renewable energy in electricity production initially increases the price of electricity and thus improves profits and the ability to re pay debts of incumbent power plants however when the share of renewable energy increases too quickly financial stability may be at stake as the burden of financing investments in renewable energy offsets the improved profitability of existing power stations all in all this study provides a unique and novel perspective on the relationship between renewable energy investments and financial stability

dynamic trading policies with price impact abstract in this paper we analyze the optimal policy for a risk averse agent who wants to sell a large block of shares of a risky security in the presence of price impact and transactions costs our framework reduces to the standard merton portfolio problem in the absence of any market frictions optimal liquidation results in revenue distributions which are substantially different from those generated by a naive strategy the main tradeoff involves choosing between revenue distributions which have high means versus those which have low variances furthermore our results suggest that the effective liquidity of a security depends on its return distribution and on the characteristics of the agent carrying out the trade as well as on the price impact function

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

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

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

can money flows predict stock returns money flow is defined as the difference between uptick and downtick dollar trading volume despite little published research regarding its usefulness the measure has become an increasingly popular technical indicator our analysis demonstrates that money flows are highly correlated with same period returns we also found strong evidence of money flow momentum in that lagged money flows can be used to predict future money flows most important is our finding that money flows appear to predict cross sectional variation in future returns their predictive ability is sensitive however to the method of money flow measurement e g the exclusion or inclusion of block trades and the forecast horizon

the upstairs market for large block transactions analysis and measurement of price effects this article develops a model of the upstairs market where order size beliefs and prices are determined endogenously we test the model s predictions using unique data for 5 625 equity trades during the period 1985 to 1992 that are known to be upstairs transactions and are identified as either buyer or seller initiated we find that price movements prior to the trade date are significantly positively related to trade size consistent with information leakage as the block is shopped upstairs further the temporary price impact or liquidity effect is a concave function of order size which may result from upstairs intermediation

personal income tax progressivity and output volatility evidence from oecd countries this paper investigates empirically the effect of personal income tax progressivity on output volatility using macro data from a sample of oecd countries over the period 1982 2009 our measure of progressivity is based on the difference between the marginal and the average personal income tax rate for the average production worker we find supportive empirical evidence for the hypothesis that higher personal income tax progressivity leads to lower output volatility this effect comes in addition to the stabilizing impact of government size and it is equally important in economic terms all other factors constant countries with more progressive personal income tax systems seem to benefit from stronger automatic stabilizers

strategic trading in a dynamic noisy market this paper studies a dynamic model of a nancial market with a strategic trader in each period the strategic trader receives a privately observed endowment in the stock he trades with competitive market makers to share risk noise traders are present in the market after receiving a stock endowment the strategic trader is shown to reduce his risk exposure either by selling at a decreasing rate over time or by selling and then buying back some of the shares sold when the time between trades is small the strategic trader reveals the information regarding his endowment very quickly

return predictability following large price changes and information releases abstract we examine return behavior following large price change events unconditional post event abnormal returns are found to be unimportant as we condition on other criteria related to the quality of information like volume and public announcements the abnormal returns become large the type of news provides further refinement if the news relates to earnings or analyst recommendations then the 20 day abnormal returns become much larger ranging from 3 to 4 for positive events and about 2 25 for negative events finally an out of sample trading strategy confirms investor under reaction and generates significant abnormal annualized returns of the order of 12 18

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

credit chains and bankruptcy propagation in production networks abstract we present a simple model of a production network in which firms are linked by supplier customer relationships involving extension of trade credit our aim is to identify the minimal set of mechanisms which reproduce qualitatively the main stylized facts of industrial demography such as firms size distribution and at the same time the correlation over time and across firms of output growth and bankruptcies the behavior of aggregate variables can be traced back to the direct firm firm interdependence in this paper we assume that the number of firms is constant and the network has a periodic static structure but the framework allows further extensions to investigate which network structures are more robust against domino effects and if the network is let to evolve in time which structures emerge spontaneously depending on the individual strategies for orders and delivery

competition in communication networks pricing and regulation by any measure the communication sector is important it is no surprise then that the communication sector has attracted the attention of both policy makers and economists in this paper we argue that four characteristics of the networks that deliver communication services make this area of particular interest we analyse the implications of networks cost structures the strong complementarity between their components the demand side externalities that arise from consumption of their services and the social obligations attached to them despite the attention that the communication sector has received many aspects of competition between networks are still poorly understood we identify some of the key issues that will continue to trouble regulators and interest academics

volume for winners and losers taxation and other motives for stock trading capital gains taxes create incentives to trade our major finding is that turnover is higher for winners stocks the prices of which have increased than for losers which is not consistent with the tax prediction however the turnover in december and january is evidence of tax motivated trading there is a relatively high turnover for losers in december and for winners in january we conclude that taxes influence turnover but other motives for trading are more important we were unable to find evidence that changing the length of the holding period required to qualify for long term capital gains treatment affected turnover investors responding to the tax incentives in the capital gains laws should produce predictable patterns in the volume of trading in a stock but not necessarily in its price this study uses past price patterns as a proxy to measure the incentives to sell or avoid selling a stock and observes trading volumes to estimate the extent to which investors respond to these incentives past price patterns may influence trading volumes for other non tax related reasons as well these are also considered we find that past prices influence current incentives to trade through both tax and non tax motives winners tend to have higher abnormal volumes than losers this would be expected if non tax related motives were predominant however the influence of tax related motives on trading volume is shown by seasonal variations in the relationship between past price changes and turnover as predicted by tax induced trading theories the volume of losers is higher than normal in december and the volume of winners is higher than normal in january we found no evidence that trading volume was affected by changes in the length of the holding period required to qualify for long term capital gains investors reactions to capital gains taxes are important for several reasons first a comprehensive understanding of investor behavior would include both price and volume understanding the relationship between taxes and volume is a fruitful and convenient method of contributing to this subject the resource allocation consequences of capital gains taxes are controversial in part because

scaling the volatility of gdp growth rates abstract the distribution of shocks to gdp growth rates is found to be exponential rather than normal their standard deviation scales with gdp where 0 15 0 03 these macroeconomic results place restrictions on the microeconomic structure of interactions between agents

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

access pricing bypass and universal service this paper discusses the interaction between competition and price regulation in telecommunications markets first we discuss how to achieve efficient entry when an incumbent s regulated retail prices are out of line with its costs second the analysis is extended to the case where entrants need to purchase network services from the incumbent except in the extreme case where entrants have no alternative but to use the incumbent s network to provide their own services i argue that i retail instruments should be used to combat retail level distortions such as universal service obligations and ii network access charges should be equal to the incumbent s cost of access excluding opportunity costs in order to achieve productive efficiency

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

the price dynamics of common trading strategies a deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices this paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies showing how they amplify noise induce structure in prices and cause phenomena such as excess and clustered volatility

transparency and liquidity a study of block trades on the london stock exchange under different publication rules this article examines whether reducing a market s transparency by delaying the publication of prices for block trades has any impact on liquidity the analysis uses a sample of 5987 blocks from the london stock exchange that cover three different publication regimes immediate 1987 88 90 minutes 1991 92 and 24 hours 1989 90 delaying publication does not affect the time taken by prices to reach a new level which is rapid under all regimes spreads differ across years but their size relates more closely to market volatility than to speed of publication there is therefore no gain in liquidity from delayed publication

the cost of institutional equity trades presented are an overview of the findings from the recent literature on the cost of u s equity trades for institutional investors and new evidence on trading costs from a large sample of institutional trades the findings discussed have important implications for policymakers and investors implicit trading costs are economically significant equity trading costs vary considerably and vary systematically with trade difficulty and order placement strategy and whether a trade price represents best execution depends on detailed data for the trade s entire order submission process especially information on pretrade decision variables such as the trading horizon

scale economies in pension fund investments a dissection of investment costs across asset classes abstract using a unique dataset of 225 dutch occupational pension funds with a total of 928 billion euro of assets under management we provide a comprehensive cross sectional analysis of the relation between investment costs and pension fund size our dataset is free from self reporting biases and decomposes investment costs for 6 asset classes in management costs and performance fees we find that a pension fund that has 10 times more assets under management on average reports 7 67 basis points lower annual investment costs economies of scale differ per asset class we find significant economies of scale in fixed income equity and commodity portfolios but not in real estate investments private equity and hedge funds we also find that large pension funds pay significantly higher performance fees for equity private equity and hedge fund investments

schumpeter meeting keynes a policy friendly model of endogenous growth and business cycles this paper studies an agent based model that bridges keynesian theories of demandgeneration and schumpeterian theories of technology fueled economic growth we employ the model to investigate the properties of macroeconomic dynamics and the impact of public polices on supply demand and the fundamentals of the economy we find profound complementarities between factors influencing aggregate demand and drivers of technological change that affect both short run fluctuations and longterm growth patterns from a normative point of view simulations show a corresponding complementarity between keynesian and schumpeterian policies in sustaining long run growth paths characterized by milder fluctuations and relatively lower unemployment levels the matching or mismatching between innovative exploration of new technologies and the conditions of demand generation appear to suggest the presence of two distinct regimes of growth or absence thereof characterized by different short run fluctuations and unemployment levels

disequilibrium dynamics an empirical study despite the amount of attention devoted in economics to the study of equilibria the process by which an equilibrium can be attained is not well understood stephen smale 1977 called this the fundamental problem of economic theory this paper explores the microeconomics of the adjustment process by examining empirically the disequilibrium behavior of firms implications for the microeconomic foundations of macroeconomics are stressed the data from german industry describe the month by month price and output changes of individual firms as well as the firms own assessments of the levels of their inventories and unfilled orders because the data are qualitative use is made of the multivariate conditional logit model developed by marc nerlove and s james press 1973 1976 and extended by kawasaki and zimmermann section i discusses the underlying model of firm behavior and the significance of the inquiry for macroeconomics in section ii the econometric techniques are briefly described in section iii the empirical results are summarized and interpretations of the results are offered in section iv

volume autocorrelation information and investor trading this study investigates whether the widely documented daily correlated trading volume of stocks is driven by individual investor trading institutional trading or both we find that at least 95 of nyse and amex stocks exhibit statistically significant positive serial correlation volume autocorrelation decreases with the level of institutional ownership of a stock we also show that the rate of arrivals of new information to the market contributes to the clustering of trades when there is high information flow to the market institutional trading generates a more pronounced effect on volume autocorrelation than individual investor trading our results are broadly consistent with the predictions of trading volume patterns suggested by most theoretical models of stock trading and by empirical research on investor trading

what factors increase the risk of incurring high market impact costs this article applies quantile regression to assess the factors that influence the risk of incurring high trading costs using data on the equity trades of the world s second largest pension fund in the first quarter of 2002 we show that trade timing momentum volatility and the type of broker intermediation are the major determinants of the risk of incurring high trading costs such risk is increased substantially by either high or low momentum and by strong volatility moreover agency trades are substantially more risky in terms of trading costs than similar principal trades finally we show that the quantile regression model succeeds well in forecasting future trading costs

on the strategic behavior of large investors a mean variance portfolio approach abstract one key assumption of markowitz s model is that all traders act as price takers in this paper we extend this mean variance approach in a setting where large investors can move prices instead of having an individual optimization problem we find the investors nash equilibrium and redefine the efficient frontier in this new framework we also develop a simplified application of the general model with two assets and two investors to shed light on the potential strategic behavior of large and atomic investors our findings validate the claim that large investors enhance their portfolio performance in relation to perfect market conditions besides we show under which conditions atomic investors can benefit in relation to the standard setting even if they have not total influence on their eventual performance the two investors two assets setting allows us to quantify performance and do sensitivity analysis regarding investors market power risk tolerance and price elasticity of demand finally for a group of well known etfs we empirically show how price variations change depending on the volume traded we also explain how to set up and use our model with real market data

changes in institutional ownership and stock returns assessment and methodology although the relation between quarterly changes in institutional investor ownership and contemporaneous stock returns is well documented the source of the relation remains unclear because institutional ownership data are unavailable at higher frequencies in this study we develop a method to generate estimates of higher frequency covariances when one variable is observed at lower frequencies e g quarterly changes in institutional ownership and monthly stock returns our method provides evidence that institutional trading has both temporary and permanent price effects and that the latter is associated with information effects

institutional trades and intraday stock price behavior abstract this paper examines the price effect of institutional stock trading using a unique data set that reports the transactions large and small of 37 large institutional money management firms the direction of each trade and the identity of the management firm behind each trade are known although institutional trades are associated with some price pressure we find that the average effect is small there is also a marked asymmetry between the price impact of buys versus sells we relate our findings to various hypotheses on the elasticity of demand for stocks the cost of executing transactions and the determinants of market impact although market capitalization and relative trade size influence the market impact of a trade the dominant influence is the identity of the money manager behind the trade