where does price discovery occur for stocks traded in multiple markets evidence from hong kong and london using a sample of hong kong listed stocks that are also traded on the london stock exchange we document the following results first london market makers use hong kong s closing prices as the benchmark for setting the opening prices in london second trading in the london market plays only a limited role in price discovery in the hong kong market third the stock returns from london trading are closely correlated with those of the hong kong market the above findings are consistent with the explanation that london trading is predominantly liquidity driven but not information driven

where is the market evidence from cross listings in the united states we analyze the location of stock trading for firms with a us cross listing the fraction of trading that occurs in the united states tends to be larger for companies from countries that are geographically close to the united states and feature low financial development and poor insider trading protection for companies based in developed countries trading volume in the united states is larger if the company is small volatile and technology oriented while this does not apply to emerging country firms the domestic turnover rate increases in the cross listing year and remains higher for firms based in developed markets but not for emerging market firms domestic trading volume actually declines for companies from countries with poor enforcement of insider trading regulation

trading volume and asset liquidity since the depth and liquidity of a market depend on the entry decisions of all potential participants each trader assesses them according to conjectures about entry by others if trade is equally costly across markets this externality leads to the concentration of trade on one market if not it can produce multiple conjectural equilibria some where trade concentrates on one market and others where large traders resort to a separate market or to search for a trading partner while fragmentation is welfare reducing in the two market case no such ranking is possible if it involves off exchange search

the use of flow analysis in foreign exchange exploratory evidence abstract this paper provides questionnaire evidence on the role of flow analysis for professional traders and fund managers this evidence suggests that besides fundamental information and technical analysis the analysis of flows provides an independent third type of information for professionals the view that flows can be used to learn about fundamentals is not consistent with the data instead evidence indicates that flows more likely provide insight into semi fundamental private information

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

consolidation fragmentation and market performance this paper studies the impact of market consolidation or fragmentation on its performance examining four alternative models of exchange a consolidated clearing house fragmented clearing houses a monopoly dealer market and an interdealer market the effects of the market mechanism on the expected quantity traded the price variance faced by individual traders the quality of market price signals the expected gains from trade and the exchange implementation costs are studied

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

the role of american depositary receipts in the development of emerging markets using a sample of 28 stock markets this chapter presents an empirical exploration of the effect of american depositary receipts adrs on emerging market development we examine the role of adrs on three aspects of market development openness defined as the degree of market transparency and reliability liquidity a measure of market activity and growth which attempts to measure the market s ability to foster the formation of new enterprises and encourage economic growth the preliminary evidence from the study is mixed adrs are instrumental in increasing openness but negatively impact both liquidity and the ability of the local market to foster economic growth also the effect of large firms listing adrs is detrimental to the development of the local market

public information and uninformed trading implications for market liquidity and price efficiency abstract we develop a rational expectations equilibrium model in which noise trading comes from discretionary liquidity traders the equilibrium quantity of aggregate noise trading is endogenously determined by the population size of liquidity traders active in the financial market by improving market liquidity public information reduces the expected trading loss of liquidity traders and thus attracts more such traders to the market which negatively affects information aggregation analyzing an alternative setting that models noise trading as coming from hedgers yields similar insights in a setting with endogenous information public information can harm information aggregation both through crowding out private information and through attracting noise trading

competing with the new york stock exchange research on information economics and securities markets dating back to stigler journal of political economy 69 1961 213 225 journal of business 37 1964 117 142 argues that trading will tend to centralize in major market centers such as the new york stock exchange nyse the nyse s recent mergers with archipelago and euronext bring questions about the viability and effects of competition between stock exchanges to the policy forefront we examine the largely forgotten but unparalleled episode of competition between the nyse and the consolidated stock exchange of new york consolidated from 1885 to 1926 the consolidated averaged 23 of nyse volume for approximately forty years by operating a second market for the most liquid securities that traded on the big board our results suggest that nyse bid ask spreads fell by more than 10 when the consolidated began to trade nyse stocks and subsequently increased when the consolidated ceased operations the empirical analysis suggests that this historical episode of stock market competition improved consumer welfare by an amount equivalent to us 9 6 billion today

international listings and risk abstract this paper examines changes in volatility associated with the listing of us firms stocks on overseas exchanges implied volatilities are calculated for 40 firms that had exchange listed options at the time of their international listing the analysis documents significant increases in anticipated volatility following the overseas exchange listing while an industry matched control sample shows no meaningful changes in volatility we interpret the findings as supportive of the noice trading hypothesis jel f30

equity trading by institutional investors evidence on order submission strategies abstract the trading volume channeled through off market crossing networks is growing passive matching of orders outside the primary market lowers several components of execution costs compared to regular trading on the other hand the risk of non execution imposes opportunity costs and the inherent free riding on the price discovery process raises concerns that this eventually will lead to lower liquidity in the primary market using a detailed data set from a large investor in the us equity markets we find evidence that competition from crossing networks is concentrated in the most liquid stocks in a sample of the largest companies in the us simulations of alternative trading strategies indicate that the investor s strategy of initially trying to cross all stocks was cost effective in spite of their high liquidity the crossed stocks would have been unlikely to achieve at lower execution costs in the open market

globalization and the value of us listing revisiting canadian evidence abstract as capital markets become integrated the value of foreign listing and consequently the number of foreign listings should be expected to decline the dramatic surge in foreign listings on us stock exchanges in recent years suggests that motivations and value of listing may also be changing as markets become increasingly globalized we explore this issue by comparing both short and long run valuation effects of canadian listings in the us in pre and post 1990 periods we document that the positive price and liquidity effects for canadian stocks surrounding us listing have declined over time the analysis of long run performance however shows that canadian firms list in the us after a strong market performance but underperform canadian market indexes by 13 30 over the three years after the listing in both pre and post 1990 periods further the determinants of long run performance appear to be significantly different from that in the short run our evidence suggests that valuation effects of us listing may be driven by several factors including liquidity and industry factors that vary cross sectionally and over time

can transparent markets survive abstract this paper investigates whether transparent markets can survive when faced with direct competition from less transparent markets we first construct a game theoretic model in which in equilibrium the low transparency dealers capture early order flow and use the resulting informational advantage to quote narrower spreads and earn more profits than their more transparent competitors we then conduct a laboratory experiment that tests and supports all of these predictions a second experiment shows that most dealers choose to be of lower transparency when they are allowed to do so however the informational advantage of low transparency decreases as there are more such dealers while the high transparency dealers get increasing benefit from informed traders who attempt to broadcast deceptive trades as a result a small number of transparent dealers persist in our markets

u k and u s trading of british cross listed stocks an intraday analysis of market integration this article analyzes intraday patterns for u k and u s trading of british cross listed stocks for each market the intraday patterns for these stocks closely resemble those of otherwise similar non cross listed stocks there is a 2 hour period each day when cross listed stocks are traded both in new york and in london this overlap is characterized by concentrated trading as private information originating in new york gets incorporated into prices in both markets cross border competition for order flow tends to reduce already declining spreads in london by contrast new york specialists maintain high spreads during the overlap overall the evidence indicates that order flow for cross listed securities is segmented article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

examining market power in the european natural gas market in this paper we develop a mixed complementarity equilibrium model for the european natural gas market this model has producers as cournot players with conjectured supply functions relative to their rivals as such these producers can withhold production to increase downstream prices for greater profits the other players are taken to be perfectly competitive and are combined with extensive pipeline seasonal and other data reflecting the current state of the market four market scenarios are run to analyze the extent of market power by these producers as well as the importance of pipeline and storage capacity

can speculative trading explain the volume volatility relation we derive a speculative trading model with endogenous informed trading that yields a conditionally heteroscedastic time series for trading volume and the squared price changes we use half hourly price change and volume data for ibm during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure although the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared price change processes it fares less well in fitting the relation between current trading volume and lags of trading volume and squared volume s and its lag s relation to squared price changes

centralised order books versus hybrid order books a paired comparison of trading costs on nsc euronext paris and sets london stock exchange this article compares the cost of trading large capitalisation equities on the hybrid order driven segment of the london stock exchange and the centralised electronic order book of euronext using samples of stocks matched according to economic sector free float capitalisation and trading volume our study shows that transaction costs are lower on the centralised order book than on the hybrid order book the presence of dealers outside the electronic order book favours the frequency of large trades but is associated with higher execution costs for all other trades and higher adverse selection and inventory costs inside the order book

ownership versus competition efficiency in public enterprise certainly the introduction of product market competition into potentially competitive or at least contestable markets can improve performance to take just one example morrison and whinston 1986 1986 estimate that even in the imperfectly contestable u s airline industry the annual u s welfare gains from deregulation have been around 6 billion

trading fees and efficiency in limit order markets competition among trading platforms has considerably reduced trading fees in stock markets we show that this evolution is not necessarily beneficial to investors although they increase gains from trade when a trade happens lower trading costs can induce investors to post limit orders with a smaller execution probability in this case gains from trade are realized less frequently and investors can be worse off our model has testable implications for the effects of trading fees and their breakdown between liquidity suppliers and liquidity demanders on limit order fill rates and bid ask spreads

intergenerational policies public debt and economic growth a politico economic analysis abstract this study presents a two period overlapping generations model with endogenous growth in each period the government representing young and old generations provides a public good financed by labor income taxation and public debt issuance and the government s policies are determined by probabilistic voting increased political power of the old lowers economic growth a debt ceiling rule is considered to resolve the negative growth effect but it creates a trade off between generations in terms of welfare

a strategic model of european gas supply gasmod abstract this paper presents a model of the european natural gas supply gasmod which is structured as a two stage game of successive natural gas exports to europe upstream market and wholesale trade within europe downstream market and which explicitly includes infrastructure capacities we compare three possible market scenarios cournot competition in both markets perfect competition in both markets and perfect competition in the downstream with cournot competition in the upstream market eu liberalization we find that cournot competition in both markets is the most accurate representation of today s european natural gas market where suppliers at both stages generate a mark up at the expense of the final customer double marginalization our results yield a diversified supply portfolio with newly emerging lng exporters gaining market shares enforcing competition in the european downstream market would lead to lower prices and higher quantities by avoiding the welfare reducing effects of double marginalization binding infrastructure capacity restrictions strongly influence the results and we identify bottlenecks mainly for intra european trade relations whereas transport capacity in the upstream market is globally sufficient in the cournot scenario

on the volatility and comovement of u s financial markets around macroeconomic news announcements the objective of this paper is to provide a deeper insight into the links between financial markets and the real economy to that end we study the short term anticipation and response of u s stock treasury and corporate bond markets to the first release of surprise u s macroeconomic information specifically we focus on the impact of these announcements not only on the level but also on the volatility and comovement of those assets returns we do so by estimating several extensions of the parsimonious multivariate garch dcc model of engle 2002 for the excess holding period returns on seven portfolios of these asset classes we find that both the process of price formation in each of those financial markets and their interaction appear to be driven by fundamentals yet our analysis reveals a statistically and economically significant dichotomy between the reaction of the stock and bond markets to the arrival of unexpected fundamental information we also show that the conditional mean volatility and comovement among stock treasury and corporate bond returns react asymmetrically to the information content of these surprise announcements overall the above results shed new light on the mechanismsbywhichnewinformationisincorporatedintopriceswithinandacrossu s financial markets

subscribing to transparency abstract the paper empirically explores how more trade transparency affects market liquidity the analysis takes advantage of a unique setting in which the shanghai stock exchange offered more trade transparency to market participants subscribing to a new software package first the results show that the additional data disclosure increased trading activity but also increased transactions costs through wider bid ask spreads thus in contrast to popular policy belief the paper finds that more transparency need not improve market liquidity second the paper finds a particularly strong immediate liquidity impact accompanied by altered trading behavior which suggests a significant impact on institutional traders subscribing relatively early lastly since the effective level of market transparency is bound to depend on how many traders are subscribing to the data the study can empirically establish the functional form between market wide transparency and liquidity the relationship is non monotonic which can explain the lack of consensus in the existing literature where each empirical study is naturally confined to specific parts of the transparency domain

changes in systematic risk following global equity issuance abstract this paper examines changes in systematic risk following global equity issues by us firms models of market segmentation show that if international capital markets are not fully integrated and demand curves for securities are downward sloping firms issue equity at higher prices by issuing in multiple markets compared to issuance on a single domestic market this would imply a reduction in the firm s cost of capital and an increase in firm value using a sample of global equity offers during 1986 1993 we find that us firms that issue equity abroad experience a decline in systematic risk subsequent to issuance after controlling for size volume and leverage effects we find that this decline in systematic risk is larger in magnitude for global compared to a control sample of domestic equity issues the larger the proportion of the offer sold abroad and the larger the increase in trading volume the bigger the decline in systematic risk using a two factor global risk model we find that while firms issuing equity abroad experience a decline in the domestic component of systematic risk the foreign component increases overall however the net effect is a decline in the cost of capital

the impact of opec on east asian oil import security a multidimensional analysis abstract east asian countries such as china japan and south korea are major importers in the international oil market therefore oil import security is critical to sustainable economic development in these countries this paper uses a modified two stage dea like model to investigate the impact of the organization of petroleum exporting countries opec on oil import security in the east asian region over time specifically three dimensional variables were introduced to the model the opec internal dimension the opec and asian country interaction dimension and the international external dimension the empirical results show a substantial difference between china and the other two countries in terms of these dimensions although the impact of opec on china s oil security has increased over time its impact on japan has declined political uncertainty in opec countries and oil price volatility are the major issues for china whereas cost is the key area of concern for japan south korea s concerns are less clear the results of this study lay an important foundation for discussing policy issues involved in regional cooperation integration and sustainable growth in the east asian region

the on the run liquidity phenomenon abstract we test the implications of a model of multi asset speculative trading in which liquidity differentials between on the run and off the run u s treasury bonds ensue from endowment shocks in the presence of two realistic market frictions information heterogeneity and imperfect competition among informed traders and a public signal our evidence suggests that i off on the run liquidity differentials are economically and statistically significant even after controlling for several of the bonds intrinsic characteristics such as duration convexity repo rates or term premiums and ii off on the run liquidity differentials are smaller immediately following bond auction dates and larger when the uncertainty surrounding the ensuing auction allocations is high when the dispersion of beliefs across informed traders is high and when macroeconomic announcements are noisy consistent with our model

stackelberg nash cournot equilibria characterizations and computations the supply side of an oligopolistic market supplying a homogeneous product noncooperatively is modeled in this market there is one leader and n followers the followers operate under the cournot assumption of zero conjectural variation and are accordingly called cournot firms the leader called a stackelberg firm specifically takes into account the reaction of the cournot firms to its output for this situation we study the behavior and implications of the joint cournot reaction curve as generated by plausible economic market assumptions in particular we study the existence and uniqueness of a stackelberg nash cournot equilibrium in addition we prescribe an efficient algorithm to determine a set of equilibrating output quantities for the firms

domestic liquidity and cross listing in the united states abstract this study examines changes in domestic liquidity after cross listing in the united states our liquidity measures are based on intraday data from domestic markets for a large sample of firms that cross list in the united states and for a matched sample of firms that do not cross list we find that unadjusted liquidity significantly improves after cross listing however after controlling for contemporaneous changes in liquidity for a matched sample of firms that do not cross list there is no evidence of improvements in domestic liquidity due to cross listing our results offer no support for the bonding hypothesis or for the hypothesis that cross listing improves domestic liquidity because of increased intermarket competition and additional order flow

market in financial instruments directive mifid stock price informativeness and liquidity abstract the paper examines the impact of mifid on stock price informativeness and liquidity in 28 eu countries we find that post mifid the stock prices reflect greater firm specific information and the market becomes more liquid consistent with the catch up hypothesis our evidence shows that the impact of mifid in terms of price informativeness is greater for countries that have weaker quality of regulation we find that regulation with enforcement improves market efficiency our results are robust with respect to the choice of price informativeness and liquidity proxies as well as the control sample

good disclosure bad disclosure we study the implications of public information in a model where market prices convey information to relevant decision makers and the uctuation of market prices is driven by multiple factors disclosure has a positive direct eect of providing new information and an indirect eect of changing the price informativeness if disclosure is about a variable of which real decision makers are well informed then the indirect eect is also positive so that the direct eect is ampli ed leading to a positive overall eect on real e ciency if disclosure is about a variable that real decision markers care to learn much then the indirect eect is negative and the direct eect is attenuated moreover in markets which aggregate private information eectively the negative indirect eect can dominate so that disclosure can harm real e ciency

anonymity adverse selection and the sorting of interdealer trades this article asks why london security dealers use more than one trading venue to trade with one another we argue that differences in the exclusivity liquidity anonymity and post trade transparency of each system permit a more efficient sorting of interdealer trades than if there were just one system our evidence comes from detailed data on where london dealers chose to place interdealer trades contrary to intuition we show that uninformed interdealer trades as measured by subsequent price impact tend to migrate to third party brokered systems where trade is anonymous by contrast informed interdealer trades tend to migrate to the direct nonanonymous public market additionally we show that this distribution of trades is supported by differences in the price improvement dealers receive in the direct and brokered markets our findings have implications for three strands of the market microstructure literature first they contribute to our understanding of the importance of anonymity and transparency in securities trading most theoretical models of the effects of anonymity and transparency predict that anonymous trading systems will attract more informed trades

a model of the operation and development of a national oil company we present a model of the exploration and development activities of a national oil company noc which uses similar technology to a private firm to extract a depletable resource however unlike the private firm the noc may have a wider range of objectives than maximizing the present value of profits specifically we assume an objective function that balances firm profitability against a political desire to favor domestic consumer surplus and domestic employment we find that the non commercial objectives faced by a noc tend to reinforce each other in their effects on profitability the timing of cash flows and employment

asian premium or north atlantic discount does geographical diversification in oil trade always impose costs abstract we develop a global oil trade model gotm to examine the ability of large crude oil exporters or importers to influence inter regional price differentials by allocating their sales or purchases respectively among different crude oil consuming or producing regions the model is based on the trade offs among freight costs qualities of the crude oils traded and the technical configurations of refineries that process the crude oil our reference case based on 2012 data minimizes the sum of freight costs and the costs of processing sub optimal grades of crude oil at a refinery we model a large middle east exporter allocating its supply regionally as the leader in a stackelberg game where all other producers and importers are price takers on the competitive fringe we then examine the ability of a coalition of importers in asia to make countervailing strategic purchases rather than act as a price taker we find that large sellers can increase their revenues while diversifying their customer base by allocating volumes to more distant markets if by doing so they capture locational rents from more proximate buyers large buyers are unable to reduce their costs compared to the competitive market outcome by adopting countervailing purchase strategies but have the potential to disrupt the rent seeking of large sellers

multimarket trading and market liquidity when a security trades at multiple locations simultaneously an informed trader has several avenues in which to exploit his private information the greater the proportion of liquidity trading by large traders who can split their trades across markets the larger is the correlation between volume in different markets and the smaller is the informativeness of prices we show that one of the markets emerges as the dominant location for trading in that security when informed traders can use their information for more than one trading period the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations market makers competing to offer the lowest cost of trading at their location consequently deter informed trading be voluntarily making the price information public and by cracking down on insider trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

volatility in the foreign currency futures market we examine the volatility implications of around the clock foreign exchange trading with transaction data on futures contracts from the chicago mercantile exchange and the london international financial futures exchange we find higher u s european and u s japanese exchange rate volatilities during u s trading hours and higher european cross rate volatilities during european trading hours while the diclosure of private information through trading may partly explain these volatility patterns we conclude that the increased volatility is more likely driven by macroeconomic news announcements an analysis of inter and intraday data also reveals that volatility increases at times that coincide with the release of u s macroeconomic news article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

modelling round the clock price discovery for cross listed stocks using state space methods u s trading in non u s stocks has grown dramatically around the clock these stocks trade in the home market in the u s market and potentially in both markets simultaneously we develop a general methodology based on a state space model to study 24 hour price discovery in a multiple markets setting as opposed to the standard variance ratio approach this model deals naturally with 1 simultaneous quotes in an overlap 2 missing observations in a nonoverlap 3 noise due to transitory microstructure effects and 4 contemporaneous correlation in returns due to market wide factors we apply our model to dutch stocks cross listed in the united states our findings suggest a minor role for the new york stock exchange in price discovery for dutch shares in spite of its nontrivial and growing market share

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies