information flow and pricing errors a unified approach to estimation and testing this study examines whether rates of information flow differ between trading and nontrading periods and whether the variances of pricing errors differ at the open and close of trading the approach improves on existing methods by allowing for correlation between pricing errors and information flow and by conducting inferences at the individual security level the daytime rate of information flow is about seven times the overnight rate and the variances of pricing errors at the open are not different from those at the close of trading this evidence differs from existing results based on return variance ratios much of the empirical market microstructure literature predicates its analysis on a model in which price changes have a permanent information related component and a transitory market friction or dealer cost component two questions that have received a great deal of attention relate to the behavior of these components the first is whether and to what extent the rate of information flow into prices differs during trading and nontrading periods this is equivalent to asking whether the variance of the permanent component per unit time is different during periods when trading occurs than when trading does not occur the second question is whether pricing errors of differing magnitudes are associated with different trading mechanisms or trading preceded by an overnight period of nontrading this corresponds to asking whether the variance of the transitory component is different depending on which trading mechanism is used or whether trading has been halted for a time more generally these questions relate to whether the permanent and transitory components of price changes are heteroskedastic although both questions share the context of this model existing studies typically focus

price discovery and learning during the preopening period in the paris bourse before the opening of the paris bourse traders place orders and indicative prices are set this offers a laboratory to study empirically the t tonnement process through which markets discover equilibrium prices since preopening orders can be revised or canceled before the opening indicative prices could be noise we test this against the hypothesis that preopening prices reflect learning early in the preopening the noise hypothesis is not rejected as the opening gets closer the informational content and efficiency of prices increase and the learning hypothesis is not rejected we also propose a gmm based estimate of the speed of learning

the effects of inflation news on high frequency stock returns previous research using daily returns finds conflicting evidence about the relationship between unanticipated inflation news and stock returns we explore the relationship by looking at the response in minutes and trades of size based stock portfolios to unexpected changes in the regularly scheduled producer price index and consumer price index announcements in particular we answer the following three questions 1 do stocks respond to inflation news 2 what is the speed and path of that response 3 is the response stable or does it vary with the economy the direction of the news or time

price continuity rules and insider trading restrictions on transaction price changes are a feature of many security markets this paper analyzes the impact of such price continuity rules on price dynamics and examines possible rationales for their existence contrary to popular belief continuity rules need not reduce price efficiency although they do result in a redistribution of profits among traders and dealers indeed continuity rules may enhance price efficiency because traders have greater incentives to gather costly information we provide a new rationale for continuity rules besides the stated objective of stabilizing prices in particular we show that continuity requirements act to restrict dealers expected profits from trading with liquidity traders the results provide insights into the design of an optimal continuity rule

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

overnight information and stochastic volatility a study of european and us stock exchanges abstract this paper provides a comprehensive evaluation of the predictive ability of information accumulated during nontrading hours for a set of european and us stock indexes we introduce a stochastic volatility model which conditions on lagged overnight information distinguishes between the nontrading periods of weeknights weekends holidays and long weekends and allows for an asymmetric leverage effect on the impact of overnight news we implement bayesian methods for estimation and ranking of the empirical models and find two key results i there is substantial predictive ability in financial information accumulated during nontrading hours and ii the performance of stochastic volatility models improves considerably by separating the asymmetric impact of positive and negative news made available over weeknights weekends holidays and long weekends

the impact of trading floor closure on market efficiency evidence from the toronto stock exchange we are the first to evaluate the impact of the trading floor closure on the corresponding efficiency of the stock price formation process on the toronto stock exchange tsx utilizing short horizon return predictability as an inverse indicator of market efficiency we demonstrate that while the switch to all electronic trading resulted in higher volume and lower trading costs the information asymmetry among investors increased as more informed and uninformed traders entered the market the tsx trading floor closure resulted in a significant decrease in informational efficiency and it took about six years for efficiency to return to its pre all electronic trading level in multivariate setting we provide evidence that changes in information asymmetry and increased losses to liquidity demanders due to adverse selection account for the largest variations in the deterioration of the aggregate level of informational efficiency our results suggest that electronic trading should complement rather than replace the exchange trading floor

order consolidation price efficiency and extreme liquidity shocks we show that the consolidation of orders is important for producing efficient prices especially during times of high liquidity demand the nyse s centralized opening call market performs better than nasdaq s decentralized opening process on typical trading days the nyse is much better than nasdaq on witching days when index arbitrage activity subjects s p 500 stocks to large predictable and mostly informationless order flow around quarterly futures contract expirations nasdaq opening price efficiency improves to nyse levels once nasdaq initiates a consolidated opening call in november 2004 but prices on the decentralized nasdaq remain less efficient at other times of day

paying for market quality many financial markets including electronic limit order markets assign designated liquidity providers lps we study the experience of the stockholm stock exchange where listed firms contract directly with lps our analysis offers insights regarding situations where designated liquidity provision may be beneficial in addition we consider the form of liquidity provision contracts including affirmative obligations required of the lp and compensation for lp services we find that low current trading activity wide spreads and higher information asymmetry increase the attractiveness of contracted liquidity provision the evidence indicates that lps trade against market movements and in times of wide spreads on balance firms contracting with lps experience a decreased cost of capital and significant improvements in market quality and price discovery

on adjustment costs and the stability of equilibria in practice one does not expect conflicting agents to move instantaneously to an equilibrium instead the final equilibrium is often the consequence of disequilibrium dynamics this paper through the use of local game theory introduces a general framework for disequilibrium dynamics based on the existence of adjustment costs the analysis is presented within the context of oligopoly theory and shows that the existence of adjustment costs will in many cases result in a unique equilibrium at which market shares are inversely proportional to these costs this paper also introduces two new solution concepts for n person normal form games

order flow and liquidity around nyse trading halts we study order f low and liquidity around nyse trading halts we find that market and limit order submissions and cancellations increase significantly during trading halts that a large proportion of the limit order book at the reopen is composed of orders submitted during the halt and that the market clearing price at the reopen is a good predictor of future prices depth near the quotes is unusually low around trading halts though specialists and0or f loor traders appear to provide additional liquidity at these times finally specialists appear to spread the quote prior to imbalance halts to convey information to market participants the costs and benef its associated with new york stock exchange trading halts are the subject of continuous debate the stated purpose of trading halts is to allow investors a chance to react to new information and to facilitate the orderly emergence of a new equilibrium price see e g nyse 1999 however little is known about the extent or nature of investor reactions to trading halts furthermore it is unclear whether these reactions support or confound attempts to reach a new equilibrium price to address these issues we use nonpublic nyse data on all superdot electronic orders to analyze the effects of trading halts on order f low spreads and the limit order book we also examine the relationships between the limit order book and the reopening price and between liquidity and post halt volatility information on order f low is an important missing element in the ongoing debate about the usefulness of trading halts one argument against trading halts is that they impede price formation because trading aggregates information that is distributed across market participants however submissions and cancellations of orders during a halt may provide an alternative source of information that combined with published indications of possible reopening prices may assist with price formation an argument in favor of trading halts is that when traders are given an opportunity to cancel orders

implications of an index contingent trading mechanism this article analyzes a call market that enables conditioning not only on an asset price but also on an index a weighted average of stock prices that is determined simultaneously with the prices of all assets the authors compare two trading systems with and without index conditioning and find that in the system with index conditioning traders indeed use the facility of index conditioning there is more depth liquidity in the market price fluctuations around true values are lower expected trading costs of liquidity traders are lower and the expected utility of informed traders is lower than in a system without index conditioning copyright 1997 by university of chicago press

opening and closing the market evidence from the london stock exchange we investigate the performance of call markets at the open and close using a unique natural experiment provided by the london stock exchange where traders can choose between a call and an off exchange dealership system although the call market dominates dealers in terms of price discovery it suffers from a high failure rate to open and close trading especially when trading conditions are difficult the call s trading costs increase with asymmetric information slow trading order flow imbalances and uncertainty traders resort to use of call auctions is negatively correlated with firm size implying that the call may not be the optimal method for opening and closing trading of medium and small sized stocks

stock market structure and volatility the procedure for opening stocks on the nyse appears to affect price volatility an analytical framework for assessing the magnitude of the structurally induced volatility is presented the ratio of variance of open to open returns to closeto close returns is shown to be consistently greater than one for nyse common stocks during the period 1982 through 1986 tbe greater volatility at the open is not attributable to the way in which public information is released since both the opento open return and the close to close return span the same period of time instead the greater volatility appears to be attributable to private information revealed in trading and to temporaryprice deviations induced by specialist and other traders the implied cost of immediacy at the open is significantly higher than at the close other empirical evidence in this article documents the volume of trading at the open the time delays between the exchange opening and the first transaction in a stock the difference in daytime volatility versus overnight volatility and the extent to which volatility is related to trading volume

does anonymity matter in electronic limit order markets we develop a model in which limit order traders possess volatility information we show that in this case the size of the bid ask spread is informative about future volatility moreover if volatility information is in part private we establish that i the size of the bid ask spread and ii its informativeness about future volatility should change in the same direction when limit order traders identifiers stop being disclosed we test these predictions using data from the paris bourse as expected we find that the average quoted spread and its informativeness are significantly smaller when limit order traders identifiers are concealed these findings suggest that the limit order book is a channel for volatility information

candlestick technical trading strategies can they create value for investors abstract we conduct the first robust study of the oldest known form of technical analysis candlestick charting candlestick technical analysis is a short term timing technique that generates signals based on the relationship between open high low and close prices using an extension of the bootstrap methodology which allows for the generation of random open high low and close prices we find that candlestick trading strategies do not have value for dow jones industrial average djia stocks this is further evidence that this market is informationally efficient

price discovery in auction markets a look inside the black box opening mechanisms play a crucial role in information aggregation following the overnight nontrading period this article examines the process of price discovery at the new yorkstockexchange single price opening auction we develop a theoretical model to explain the determinants of the opening price and test the model using order level data we show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market this is consistent with specialists extracting information from observing the evolution of the limit order book in addition the specialist s opening trade reflects noninformational factors such as price stabilization requirements

a simple cost reduction strategy for small liquidity traders trade at the opening we extend the market microstructure literature by examining trading strategies of a small discretionary liquidity trader in call and continuous markets our investigation of trading strategies uses intraday market and limit orders and introduces the market at open order as an alternative strategy for a small liquidity trader we find that a small trader can reduce transaction costs by trading at the opening using tick by tick transaction data we demonstrate that the market at open order consistently produces better prices than market and limit orders executed during the trading day i introduction traders have an economic incentive to act strategically in this study we examine three types of submission strategies for small liquidity traders the marketat open order intraday market orders and intraday limit orders our objective is to determine if any particular strategy consistently outperforms the other strategies in receiving better prices for a small discretionary liquidity trader we use tickby tick transaction data to simulate order executions our results demonstrate that the market at open strategy benefits a small liquidity trader we contribute to the existing literature in that we empirically contrast trading strategies in a continuous market and a call market and provide empirical support for the theoretical trading models that show liquidity traders have a preference to band together when submitting orders to trade the first set of strategic trading models concentrates on the optimal trading behavior of informed traders for example kyle 1985 looks at a sequential batchtrading market in which informed traders and liquidity traders submit orders to a risk neutral market maker attention is paid to the strategic trading patterns of

opening prices on the new york stock exchange abstract the prices of opening transactions on the new york stock exchange are determined quite differently from prices of subsequent transactions this paper tests the null hypothesis that opening prices are as representative of contemporaneous equilibrium stock values as subsequent intra day transactions prices with one possible exception there is no basis for rejecting this hypothesis despite the very different trading mechanisms used in opening trades and intra day trades

auctions as algorithms abstract computerized auction systems are introduced as a new form of market institution characterized by communications technologies for passing messages between traders and a set of programmed rules that restrict the message space and process messages into transactions prices and quantities the stationary distributions of price quotations and transactions prices given order arrival rates conditioned on information available through the limit order book are derived for an automated continuous auction system with price and time priority rules the key to the analysis is the application of the theory of queues with preemptive priorities to the problem of two interactive queues the model then is used to characterize the structure of the electronic order book in terms of the distributions of the number of buy and sell orders in the system and the waiting time to trade execution the theoretical development is applied to a comparison of automated continuous and periodic single price auctions with respect to price volatility the magnitude of the bid ask spread and volume traded per unit of time

earnings expectations investor trade size and anomalous returns around earnings announcements abstract we provide evidence that identifiable subsets of investors use significantly different information sets investors initiating large trades respond to analysts earnings forecast errors while investors initiating small trades respond to a less sophisticated signal that underestimates the implications of current earnings innovations for future earnings levels this suggests small investors exhibit the behavior that bernard and thomas journal of accounting and economics 13 305 340 theorize causes post earnings announcement drift we also use analysts forecasts to significantly improve the predictability of returns around earnings announcements previously documented by bernard and thomas finally results attempting to link return predictability to the prevalence of small investor trading are mixed

the trading decision and market clearing under transaction price uncertainty this paper models an individual s trading decision given 1 his her demand function to hold shares of an asset 2 his her expectation on what the market clearing price will be and 3 the design of the market which determines how orders will be translated into trades the particular market design we consider is the batched trading periodic call regime assuming investors are distributed according to their propensities to hold shares we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which with trading friction these solutions differ from pareto efficient values the importance of this analysis for various issues concerning market design is noted when markets are not frictionless and transaction prices are uncertain the act of trading requires analysis this paper models an individual s trading decision in secondary financial asset markets in so doing we study the order flow as an endogenous part of the system we show how given an underlying demand curve the trader will choose an optimal price quantity order to transmit to the market and we model the aggregation of orders to obtain market clearing values for price and volume these models are used to show the way in which the prices and trading volume established on the market will in general differ from their pareto efficient values much of the microstructure literature that studies the behavior of transaction prices in a nonfrictionless market has assumed that orders are generated by some exogenously given stochastic process this has been true for instance in the

hypergrowth in an east asian nic public policy and capital accumulation in singapore abstract singapore has produced the world s highest investment ratios known to account for growth more rapid than in any other less developed country over the past three decades but such high investment needs explanation we trace singapore s public policy of increasing tax concessions and infrastructural spending in effect subsidies to private firms and use an open economy neoclassical model to show how by attracting footloose foreign capital and raising investment levels these policy measures can drive growth the consequent transformation of living standards in singapore suggests in accordance with theory but contrary to most practice that for some less developed countries effectively zero tax on foreign direct investment may be a beneficial strategy yet for both singapore and other would be late industrializers major issues of development strategy arise from the kind of input driven growth analyzed in this article

a closing call s impact on market quality at euronext paris abstract the paris bourse currently euronext paris refined its trading system to include electronic call auctions at market closings in 1996 for its less liquid continuous b stocks and in 1998 for its more actively traded continuous a stocks this paper analyzes the effects of the innovation on market quality our empirical analysis of price behavior for two samples of firms 50 b stocks and 50 a stocks for two different calendar dates 1996 and 1998 indicates that introduction of the closing calls has lowered execution costs for individual participants and sharpened price discovery for the broad market we further observe that market quality is improved at market openings albeit to a lesser extent we suggest that a positive spillover effect explains the closing call s more pervasive impact

a trading mechanism contingent on several indices we introduce a trading mechanism where the execution of an order on a security can be made contingent on the relation between the clearing price of the security and the clearing price of one or several indices a mechanism similar to ours but limited to only one index was implemented on the tel aviv stock exchange we argue that it is in some cases crucial to make the execution of an order contingent on several indices our mechanism consists of a particular implementation of a double sided multi unit combinatorial auction with substitutes or dmcs auction which we introduced in an earlier article