the fundamental determinants of interest rate differentials in the erm the paper analyses the sources of persistent interest rate differentials vis a vis germany that have existed in belgium denmark france ireland italy and the netherlands in a target zone system like the erm interest rate differentials mainly reflect devaluation expectations which are measured here by raw 1 month euromarket interest rate differentials drift adjusted 1 month differentials and differentials in long term government bond yields the role of a large set of fundamental macroeconomic variables that may have affected these devaluation expectations is investigated within a vector autoregressive var setting by means of granger causality tests impulse response functions and variance decompositions we find no evidence that fundamentals are more relevant to drift adjusted devaluation risk than for unadjusted interest rate differentials a significant impact of inflation budget deficits and unemployment becomes evident for almost all erm participants

the effect of business risk on corporate capital structure theory and evidence under corporate and personal taxation we demonstrate that the relation between optimal debt level and business risk is roughly u shaped this result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option therefore the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options results of empirical tests offer support for the predicted u shaped relationship

collapsing exchange rate regimes and exchange rate dynamics some further examples abstract this paper extends some recent perfect foresight models of balance of payments crises and exchange rate realignments to a world of smart speculators sticky prices and restricted international capital movements the likelihood and timing of a regime collapse are shown to depend upon initial foreign reserve endowments monitary policy speeds of market adjustment and future exchange rate policy these factors are also shown to influence the dynamic behavior of the exchange rate and prices during a transitional period of floating

a model of capital structure when earnings are mean reverting a multiperiod model of optimal capital structure is developed under the assumption that earnings follow an autoregressive process firm value and leverage vary through time and at each date the firm achieves an optimal debt level that is a function of the full state contingent debt policy the reversion parameter of the earnings series is shown to be positively related to various measures of variability and negatively related to leverage if earnings processes are not homogeneous across firms then standard earnings risk measures in capital structure studies do not adequately represent crosssectional differences in variability in firm value

on the interaction of real and financial decisions of the firm under uncertainty this study analyzes the interaction between the optimal level of investment and debt financing for this purpose a model is structured in which a firm facing an uncertain price has to decide on its optimal level of investment and debt the amount of investment sets a limit on output whose optimal level is determined after price is realized the debt involved is risky there exists a possibility of bankruptcy the analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage we also demonstrate that as the tax rate increases optimal capacity decreases and optimal leverage increases an analysis of the impact of changes in the expected price shows that under some conditions an increase in expected price would lead to an increase in optimal investment firm size and a decrease in optimal debt

buying and selling attacks on fixed exchange rate systems abstract in this paper we show how rational expectations models of speculative attacks on fixed exchange rate systems can be extended to take into account the possibility that the central bank could be forced to either devalue or revalue essential to the analysis are the concepts of buying attack and selling attack by means of which we were able to describe how expectations about the future exchange rate are formed we also provide a discussion on the problem of uniqueness of the equilibrium that may arise in this kind of speculative attack models

price clustering on the shanghai stock exchange abstractwe investigate price clustering of intraday trades and negotiated block trades on the shanghai stock exchange sse from 2003 to 2009 prices of traded assets tend to cluster on certain final digits such as 0 and 5 in chinese culture 8 is associated with good luck and 4 with death so these numbers may be attractive or avoided we find that price clustering on the final digit of 0 is significantly higher during the morning call auction and early in the trading day we find no evidence of price clustering for the digit 8 but there is a significant dearth of prices ending in the inauspicious number 4 price clustering is significantly higher for negotiated block trades for which about 28 end with 0 multivariate analysis shows that price clustering is lower for more liquid firms but higher for firms with higher return volatility a higher price level or when the market is volatile our evidence supports the costly negotiation hypothesis our results also support the attraction hypothesis in t

a currency crisis model with an optimising policymaker abstract a model is presented in which the abandonment of a fixed exchange rate regime is triggered by an optimising policymaker who wants to loosen monetary policy and boost aggregate demand agents in the foreign exchange market know the policymaker s objective function and build expectations of a regime switch into interest differentials the resulting rise in interest rates affects the policymaker s decision to switch regime it is shown that a rational expectations equilibrium exists where the fixed rate is abandoned in response to adverse demand shocks in some circumstances multiple equilibria arise which may lead to self fulfilling crises

are firms underleveraged an examination of the effect of leverage on default probabilities a commonly held view in corporate finance is that firms are less leveraged than they should be given the potentially large tax benefits of debt in this paper i study the effect of firms leverage on default probabilities as represented by the firms ratings using an instrumental variable approach i find that the leverage s effect on ratings is three times stronger than it is if the endogeneity of leverage is ignored this stronger effect results in a higher impact of leverage on the ex ante costs of financial distress which can offset the current estimates of the tax benefits of debt

on the existence of an optimal capital structure theory and evidence one of the most contentious issues in the theory of finance during the past quarter century has been the theory of capital structure the geneses of this controversy were the seminal contributions by modigliani and miller 18 19 the general academic view by the mid 1970s although not a consensus was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs no sooner did this general view become prevalent in the profession than miller 16 presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level since then there has developed a burgeoning theoretical literature attempting to reconcile miller s model with the balancing theory of optimal capital structure e g deangelo and masulis 5 kim 12 and modigliani 17 the general result of this work is that if there are significant leverage related costs such as bankruptcy costs agency costs of debt and loss of non debt tax shields and if the income from equity is untaxed then the marginal bondholder s tax rate will be less than the corporate rate and there will be a positive net tax advantage to corporate debt financing the firm s optimal capital structure will involve the trade off between the tax advantage of debt and various leverage related costs the upshot of these extensions of miller s model is the recognition that the existence of an optimal capital structure is essentially an empirical issue as to whether or not the various leverage related costs are economically significant enough to influence the costs of corporate borrowing the miller model and its theoretical extensions have inspired several timeseries studies which provide evidence on the existence of leverage related costs trczinka 28 reports that from examining differences in average yields between taxable corporate bonds and tax exempt municipal bonds one cannot reject the miller hypothesis that the marginal bondholder s tax rate is not different from the corporate tax rate however trczinka is careful to point out that this finding does not necessarily imply that there is no tax advantage of corporate debt if the personal tax rate on equity is positive indeed buser and hess 1 using a longer time series of data and more sophisticated econometric techniques estimate that the average effective personal tax rate on equity is statistically positive and is not of a trivial magnitude more importantly they document evidence that is consistent with the existence of significant leverage related costs in the economy

stability without a pact lessons from the european gold standard 1880 1914 stability pacts european lessons from the gold standard the gold standard was a system of fixed exchange rates that offered little opportunity for carrying out monetary policies short of suspending gold convertibility trade integration and capital mobility were very high it is worthwhile asking whether there are useful lessons to draw for emu from european experience during that period one clear lesson is that debts matter another basic finding is that the stability of the european gold standard depended on the underlying price trend deflation prior to 1895 resulted in rising public debt burdens which forced some countries to leave the system once gold was discovered and deflation gave way to inflation real interest service fell debts grew more slowly and a high degree of convergence allowed most countries to return to gold for emu this result implies that stability will hinge on the ecb s policy not being too restrictive other lessons concern the fragility of institutions in the face of deep public finance difficulties the risks for the single market of leaving out countries that have not fully converged and the existence of a virtuous cycle including low real interest rates fast growth and debt reduction marc flandreau jacques le cacheux and frederic zumer

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

interaction of debt agency problems and optimal capital structure theory and evidence e oeg more leverage always wcfsen tbe debt ageocy problem this paper ptesents a unified analysis that acconntb for both risk shifting and nixler iiivestiiient ddbt agency problems for firms with positive marginal volatility of investment defined as the change in cash flow volatility cone ponding to a change of itwestment scale equity holders risk shifting incentive will midgate the under investment problem this inqdies that coturary to ccmventional views the total agency cost of debt does not unifcsmly increase with leverage this model fiiither predicts tbat for mg growth firms in which the under investment problem is severe the optimal debt ratio is positively related to the marginal volatility of investmenl empirical results suppmt this prediction

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

technology debt and the exploitation of growth options abstract this paper analyzes the effect of the firm s technology on the agency costs of debt it is shown that for an important class of technologies agency costs are not a uniformly rising function of leverage for these technologies relatively high leverage can be consistent with a small tax subsidy the effect of technology on the exploitation of real options by a levered firm is examined the analysis provides a framework for a direct test of the agency cost of debt hypothesis using cost data

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

risks and financing decisions in the energy sector an empirical investigation using firm level data using a sample of 102 uk energy firms over the period 1981 2009 this paper empirically examines the effects of uncertainty on firms leverage decisions the results indicate that both firms specific and macroeconomic uncertainty have negative sizeable and statistically significant impacts on the uk energy sector firms target leverage the results also indicate that the profitability of energy firms plays an important role in uncertainty leverage relationship by changing the total effect of uncertainty on leverage while more profitable firms appear to reduce their leverage by a relatively large amount in response to increased macroeconomic uncertainty they are less likely to be affected by firm specific uncertainty these results suggest that stability in macroeconomic conditions and business activity is important to the stability of the capital structure of firms in the energy sector which would in turn be conducive to stability in their investments and production

dynamic commitment and incomplete policy rules considering the dynamics of commitment highlights some neglected features of time inconsistency problems we modify the standard rules versus discretion question in three ways 1 a government that does not commit today retains the option to do so tomorrow 2 the government s commitment capability is restricted to a class of simple rules and 3 the government s ability to make irrevocable commitments is restricted three results stand out first the option to wait makes the incumbent regime rules or discretion relatively more attractive second the option to wait means that increased uncertainty makes the incumbent regime more attlwactive third because the commitment decision takes place in real time policy choice displays hysteresis when monetary policy is subject to dynamic inconsistencies optimal policy requires some precommitment by the central bank despite a proliferation of mechanisms designed to address this problem work in this area has continued to assume a once and for all choice between rules and discretion this paper asks two closely related questions first what happens if commitment decisions are made in real time so that failure to commit today does not rule out the possibility of commitment tomorrow second if governments can make only commitments that are difficult but not impossible to reverse what determines the dynamics of commitment and reversal the assumption of once and for all choice enforces simplistic dynamics on the policy process if the standard models are interpreted literally for example the commitment problem for u s monetary policy is moot having been resolved with the founding of the federal reserve system in 1914 if not at the constitutional convention of 1789 much of the interest in dynamic inconsistency however arises pre

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

a viable gold standard requires flexible monetary and fiscal policy national domestic credit expansion dce policies which offset the effect of money demand shocks on international gold reserves the gold standard collapses with certainty in finite time through a speculative selling attack against one of the currencies various policies for postponing a collapse are considered when a responsive dce policy eliminates the danger of a run on a country s reserves the exogenous shocks disturbing the system which previously were reflected in reserve flows now show up in the behaviour of the public debt unless the primary non interest government deficit is permitted to respond to these shocks the public debt is likely to rise or fall to unsustainable levels for the idealized gold standard analysed in the paper viability can be achieved only through the active and flexible use of monetary and fiscal policy

unionization incomplete contracting and capital investment this article examines empirically the hypothesis that incomplete contracts and resulting opportunistic behavior over the return to sunk assets reduces investment union firm contracts are incomplete because they 1 do not prevent all actions aimed at changing the existing contract 2 cover a relatively short time period and 3 do not extend to union members yet to be hired the primary response of firms is to reduce investment in specific durable assets and also to reduce employment growth and increase debt the authors find fairly strong evidence of these effects in a sample of large publicly traded firms using firm specific measures of unionization copyright 1993 by university of chicago press

real options agency conflicts and optimal capital structure abstract we examine the impact of a stockholder bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy we find that an equity maximizing firm exercises the option too early relative to a value maximizing strategy and we show how this problem can be characterized as one of overinvestment in risky investment projects equityholders incentive to overinvest significantly decreases firm value and optimal leverage and significantly increases the credit spread of risky debt numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics

soes trading and market volatility the national association of security dealers alleges that professional trader use of the small order execution system soes causes greater security price volatility we docu ment bidirectional granger causality between a proxy for professional soes trading the frequency of maximum sized soes trades and a measure of stock price volatility we find that high levels of volatility precede high levels of maximum sized soes trades suggesting that volatility causes more frequent large soes trades likewise over a one minute time interval high levels of maximum sized soes trades cause high volatility over longer periods however intense maximum sized soes trading causes lower volatility inter preted in conjunction with harris and schultz 1997 these results suggest that high levels of maximum sized soes trades lead to more efficient price discovery in light of these results we believe that efforts to eliminate soes based on volatility considerations are unwarranted

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

are currency crises self fulfilling abstract this paper studies the respective roles of the fundamentals and self fulfilling speculation in currency crises we first present a model of a fixed exchange rate system in which self fulfilling speculation can arise following a bifurcation in the fundamentals we then estimate the model in the case of the 1992 3 crisis of the french franc and find some evidence that self fulfilling speculation was at work

discrete devaluations and multiple equilibria in a first generation model of currency crises the flrst generation models of currency crises have often been criticized because they predict that in the absence of very large triggering shocks currency attacks should be predictable and lead to small devaluations this paper shows that these features of flrst generation models are not robust to the inclusion of private information in particular this paper analyzes a generalization of the krugman flood garber kfg model which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals in this environment the kfg equilibrium of zero devaluation is only one of many possible equilibria in all the other equilibria the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg giving rise to unpredictable and discrete devaluations

bankruptcy and agency costs their significance to the theory of optimal capital structure we support and generalize our original results 1978 in light of potential impediments to a pure market solution to agency problems and potential causal links between liquidation and bankruptcy in the case of bankruptcy costs market impediments are easily elimi nated through the inclusion of simple provisions in corporate charters and bond inden tures further we demonstrate that recent attempts to link liquidation costs to capital structure are without merit if the firm is to be liquidated on the basis of a rule other than one that maximizes the total value of all the claimants arbitrage profits arise and informal reorganization will discipline management to follow the liquidation rule that is optimal for existing securityholders also we find that the pure market solution is not readily generalizable to other classes of agency problems particularly the risk incentive problem how ever the alternative solution of the risk incentive problem through complex financing contracting may be useful in explaining complexities in contemporary financial contracts in a previous paper 1978 we employed arbitrage arguments to show that in a well functioning market bankruptcy costs are an insignificant determinant of a firm s capital structure we also pointed out that the decision to liquidate and its associated costs can be separated from the event of bankruptcy moreover any costs actually associated with the event of bankruptcy must be limited to the costs associated with an informal reorganization of the capital structure in the capital market prior to default these results were argued to hold under a com plex environment with multiple periods multiple securities and heterogeneous expectations we concluded that bankruptcy costs would be a significant deter minant of capital structure only in the face of irrationality on the part of market participants or unavoidable impediments to the arbitrage process since the publication of our paper there has been an accumulation of the

fixed exchange rates as a means to price stability what have we learned abstract the paper discusses what we have learned from last year s currency crises in erm and the nordic countries about fixed exchange rates as a means to achieve price stability after discussing the explanations for the crises the paper concludes that fixed exchange rates are not a shortcut to price stability monetary stability and credibility have to be built at home and cannot easily be imported from abroad fixed exchange rates are more fragile and difficult to maintain than previously thought they may even be in conflict with price stability by inducing a procyclical destabilizing monetary policy and by inducing an inflation bias building monetary credibility is even more important with flexible exchange rates

asset substitution and the agencycosts of debt financing agency costs of debt have been advanced in the literature as an important consideration foroptimal corporate debt policies recently there have been some doubts concerning the theoretical foundations of the notion that these costs increase as the firm employs more debt in this paper we examine explicitly the incentive for asset substitution by solving endogenously for the optimal risk policy the results support the notion that more debt aggravates shareholders incentives to take risk we also investigate the marginal agency cost function and discuss conditions for interior optimal capital structure

the limitation of monotonicity property of option prices an empirical evidence many option pricing models are based on the assumption that the underlying asset price follows one dimensional diffusion process an alternative approach is to test the properties that should hold for all models based on a given stochastic process for the underlying asset following perignon 2006 we test the empirical validity of the monotonicity property for option prices by collecting all transaction data from 1 july 2006 to 31 december 2006 for option contracts traded on the taiwan futures exchange taifex we find that sampled intraday option prices violate the monotonicity property between 29 97 and 57 of the time and that call and put prices often increase or decrease together we also find evidence to show that the frequent violations of the monotonicity property are to a large extent attributable to microstructure effects and that they arise from rational trading tactics

small new firms and the return to alternative sources of finance this study analyses the returns to alternative sources of finance in the small new firm sector prior work in this area has concentrated on large established firms and has been subject to significant problems of interpretation many of these problems are absent when considering small new firms and this paper suggests that the various forms of finance used differ in terms of the return on capital employed they are associated with in particular sources of bank finance for small new firms are associated with higher returns than other available sources of finance

market maker quotation behavior and pretrade transparency we examine the impact of differing levels of pretrade transparency on the quotation behavior of nasdaq market makers we find that market makers are more likely to quote on odd ticks and to actively narrow the spread when they can do so anonymously by posting limit orders on electronic communication networks ecns from a public policy perspective our findings suggest that making the level of pretrade transparency on nasdaq more opaque by allowing anonymous quotes could improve price competition and narrow spreads further

symposium on market microstructure focus on nasdaq abstract this special issue of the journal of financial economics includes six articles that analyze the market microstructure of nasdaq in various ways the question of the costs of trading on nasdaq has become contentious in both the academic and legal regulatory arenas since the christie and schultz 1994 article first noted that many actively traded nasdaq stocks were almost never quoted on odd eights the articles in this symposium bring new and interesting insights to this debate

determinants of small firm debt ratios an analysis of retail panel data in this paper the relevance of some debt ratio determinants from the recent theory of finance is empirically investigated in a small business sector the data used in this study consist of average financial data of 27 shoptypes in 20 different years covering a period of 24 years the panel character of the data facilitates the use of analytical techniques aimed at reducing or avoiding the biasing effect of omitted variables on the outcomes the main conclusion is that the theoretical determinants appear indeed to be relevant for the small business sector investigated here but the influences encountered in the analyses are far less straightforward than the hypothesized effects in the theory influences on total debt are frequently found to be the net effects of opposite influences on long and short term debt and some variables show large time and industry specific effects further distinct patterns in the time specific effects were found

corporate financing an artificial agent based analysis we examine corporate security choice by simulating an economy populated by adaptive agents who learn about the structure of security returns and prices through experience through a process of evolutionary selection each agent gravitates toward strategies that generate the highest payoffs despite the fact that markets are perfect and agents maximize value a financing hierarchy emerges in which straight debt dominates other financing choices equity and convertible debt display significant underpricing in general the smaller the probability of loss to outside investors the more likely the firm is to issue the security and the smaller the security s underpricing

liquidity externalities and adverse selection evidence from trading after hours this paper examines liquidity externalities by analyzing trading costs after hours there is less than 1 20 as many trades per unit time after hours as during the trading day the reduced trading activity results in substantially higher trading costs quoted and effective spreads are three to four times larger than during the trading day the higher spreads reflect greater adverse selection and order persistence but not higher dealer profits because liquidity provision remains competitive after hours the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day understanding network effects and liquidity externalities is one of the most important outstanding issues in market design madhavan 2000 and market regulation macey and o hara 1999 liquidity externalities arise from bringing traders together in space and time to reduce search and trading costs bringing traders together creates liquidity externalities because the additional traders arriving in the marketplace reduce trading costs for all investors to date attention has focused almost exclusively on spatial network effects by examining the trading of securities in different markets at the same time lee 1993 hasbrouck 1995 and others in contrast this paper studies the effects of temporal consolidation of trades by analyzing trading during and outside of exchange trading hours a well known liquidity externality arises from asymmetric information rational informed traders break up their orders across markets and over time this provides incentives for liquidity traders to consolidate their trades geographically garbade and silber 1979 mendelson 1982 1987 pagano 1989a 1989b and intertemporally admati and pfleiderer 1988 and foster and viswanathan 1990 it has been difficult to document the importance of these liquidity externalities however unless there are barriers that restrict the flow of orders from one trading venue to another in equilibrium contemporaneous

borrowing to defend the exchange rate and the timing and magnitude of speculative attacks abstract the paper analyses the implications for the timing and magnitude of a speculative attack on a fixed exchange rate of government borrowing to increase the stock of international reserves it is shown that such borrowing reduces the likelihood of an early collapse and increases the likelihood of an eventual collapse the magnitude of the speculative attack also increases

market microstructure of the pink sheets abstract we study the microstructure of the pink sheets and assess the ability of existing theory to capture salient features of this relatively unstructured and unregulated market clustering patterns in quotes quoted spreads and trade prices indicate that market participants have selected price dependent tick sizes for different stocks clustering intensity varies across stocks as a function of proxies for information availability similarly the bid ask spread varies as a function of volatility and liquidity these results suggest 1 microstructure research has established robust predictions of market attributes and 2 unstructured markets are able to develop at least some effective behavioral norms endogenously

frictionless commerce a comparison of internet and conventional retailers there have been many claims that the internet represents a new nearly frictionless market our research empirically analyzes the characteristics of the internet as a channel for two categories of homogeneous products books and cds using a data set of over 8 500 price observations collected over a period of 15 months we compare pricing behavior at 41 internet and conventional retail outlets we find that prices on the internet are 9 16 lower than prices in conventional outlets depending on whether taxes shipping and shopping costs are included in the price additionally we find that internet retailers price adjustments over time are up to 100 times smaller than conventional retailers price adjustments presumably reflecting lower menu costs in internet channels we also find that levels of price dispersion depend importantly on the measures employed when we compare the prices posted by different internet retailers we find substantial dispersion internet retailer prices differ by an average of 33 for books and 25 for cds however when we weight these prices by proxies for market share we find dispersion is lower in internet channels than in conventional channels reflecting the dominance of certain heavily branded retailers we conclude that while there is lower friction in many dimensions of internet competition branding awareness and trust remain important sources of heterogeneity among internet retailers

retail strategies on the web price and non price competition in the online book industry two conflicting predictions have emerged regarding the effect of low cost information on price the first states that all internet retailers will charge the same low price for mass produced goods the second states that internet retailers will differentiate to avoid intense price competition using data collected in april 1999 on the prices of 107 books in thirteen online and two physical bookstores we find similar average prices online and in physical stores and substantial price dispersion online analysis of product differentiation yields no clear results the substantial premium charged by amazon provides indirect evidence of product differentiation

bankruptcy risk and optimal capital structure this study finds shortcomings in empirical tests of the capital structure irrelevance hypothesis the alternative hypothesis is that firms choose value maximizing mixes of debt and equity on account of bankruptcy costs and the tax deductibility of interest payments based upon the cross sectional implications of the tax shelter bankruptcy cost hypothesis an alternative test of the irrelevance hypothesis is performed the test examines the relationship between failure rates and leverage ratios for 36 lines of business the results are inconsistent with the irrelevance hypothesis in their landmark paper modigliani and miller 26 demonstrate that under certain assumptions the market value of a firm is independent of its capital structure these assumptions include the absence of taxes transactions costs and bankruptcy costs recently miller 24 has argued that the introduction of corporate and personal taxes does not alter the capital structure irrelevance result in the absence of bankruptcy costs 1 the inclusion of bankruptcy costs generally considered in conjunction with the tax deductibility of interest payments has led others to conclude that capital structure will affect the value of the firm 2 in this case value maximizing firms may choose optimal capital structures consisting of both debt and equity there have been numerous attempts to discriminate empirically between the miller irrelevance mi hypothesis and the tax shelter bankruptcy cost ts bc hypothesis several are discussed in section i of this paper there it is argued that studies attempting to measure directly the effect of changes in capital structure on firm values are subject to serious complications and are unable to discriminate between the mi and ts bc hypotheses other studies focus on cross sectional implications of the mi and ts bc hypotheses the cross sectional tests are based on the assertion that bankruptcy costs may tend to induce firms with greater business risk to include less debt in their capital structures whereas the mi hypothesis does not predict such a relationship unfortunately the existence of positive bankruptcy costs is not sufficient to ensure that the ts bc hypothesis will predict the inverse relation

financing the small firm this study presents a framework to delineate financing the small firm special consideration is given to small firms unique financing sources such as trade and bank credit entrepreneur s own resources informal investment and venture capital the small firm has limited or no access to many traditional debt and equity markets that supply long term financing to the corporate world and therefore operates in segmented and imperfect financial markets the links between small firms financing opportunities and managerial goals are traced from the start up stage through establishing a mature firm as the small firm matures it operates in a broader financial market this study establishes the foundation for future empirical research

do call prices and the underlying stock always move in the same direction this article empirically analyzes some properties shared by all one dimensional diffusion option models using sp options are not redundant securities nor ideal hedging instruments puts and the underlying asset prices may go down together much of the extant knowledge about option pricing is based on the assumption that the underlying asset price follows a one dimensional diffusion process examples of such option pricing models include the classic black scholes 1973 merton 1973 the cox ross 1976 constant elasticity of variance the ones studied in derman and kani 1994 rubinstein 1994 bergman grundy and wiener 1996 bakshi cao and chen 1997 2000 and dumas fleming and whaley 1998 all models in the one dimensional diffusion class share three basic properties first call prices are monotonically increasing and put prices are monotonically decreasing in the underlying asset price the monotonicity property second as the underlying asset price is the sole source of uncertainty for all of its options option prices must be perfectly correlated with each other and with the underlying asset the perfect

evidence on the impact of the agency costs of debt on corporate debt policy in the last several years there has been increased theoretical emphasis on the agent principal problem as it applies to corporate finance this paper is an attempt to empirically test for the presence of the agency costs and their relation to the debt policy of corporations we find that firms with higher insider ownership have greater debt ratios than firms with lower insider ownership which may be explained by the agency costs of debt and or the agency costs of equity other regression results tend to confirm the theoretically optimal relationships put forth by myers we find that high growth firms use less debt rather than more debt high operating risk firms use more debt rather than less debt and firm size appears to be uncorrelated to the level of debt

high frequency trading and extreme price movements abstract are endogenous liquidity providers elps reliable in times of market stress we examine the activity of a common elp type high frequency traders hfts around extreme price movements epms we find that on average hfts provide liquidity during epms by absorbing imbalances created by non high frequency traders nhfts yet hft liquidity provision is limited to epms in single stocks when several stocks experience simultaneous epms hft liquidity demand dominates their supply there is little evidence of hfts causing epms

speculation and the decision to abandon a fixed exchange rate regime this paper investigates the extent to which it is possible for speculative attacks to be predictable given information on economic fundamentals a standard model of predictable attacks is extended to incorporate an optimizing monetary authority it is shown that while incorporating a forward looking monetary authority improves our understanding of many observed phenomena it also implies that the branch of the literature that places emphasis on predictable movements in fundamentals cannot generate predictable speculative attacks in addition the model provides useful insights into the viability of temporary nominal anchor policies and a theoretical foundation for an important empirical methodology

implicit transaction cost management using intraday price dynamics using the exchange liquidity measure we show that implicit transaction costs exhibit intraday regularities around specific price change signals for a sample of european blue chips publicly quoted

collapsing exchange rate regimes another linear example abstract in the literature on speculative attacks on a fixed exchange rate it is usually assumed that the monetary authority responsible for fixing the rate reacts passively to the monetary disruption caused by the attack this assumption is grossly at odds with actual experience where the monetary base implications of the attacks are usually sterilized such sterilization means that the attack is no longer exclusively a monetary event and requires that the standard attack model be broadened to include the effects of sterilization on other markets these issues are motivated by reference to the december 1994 collapse of the mexican peso

collusion in bertrand vs cournot competition a virtual bargaining approach how do firms manage to collude without communicating why do we find more collusion in price competition than in quantity competition why is collusion so hard to detect we examine strategic behavior in competitive interactions by developing and applying the concept of virtual bargaining when decision makers virtually bargain they mentally simulate and choose among agreements that they could reach if they were able to explicitly negotiate with each other virtual bargainers focus on agreements that offer some protection against the possibility that their counterparts may deviate and best respond to these agreements we develop a formal account of virtual bargaining and demonstrate that it leads to collusion in bertrand but not in cournot competition in this framework collusion is a result of virtual bargaining as a mode of reasoning and requires neither communication nor dynamic considerations such as rewards and punishments between the players this paper was accepted by manel baucells decisi

an investigation of transactions data for nyse stocks using transactions data the behavior of returns and characteristics of trades at the micro level is examined a minute by minute market return series is formed and tested for normality and autocorrelation evidence of differences in return distributions is found among overnight trades trades during the first 30 minutes following the market opening trades at the close and trades during the remainder of the day the latter distribution is found to be normal unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day when the beginningand end of the day effects are omitted autocorrelation in the market return series is reduced substantially a number of patterns in trading are reported this paper empirically investigates the nature of the return generating process and the characteristics of trade size price changes trading frequency and trading interval at the level of individual trades for a large sample of nyse stocks previous studies of market indices have used daily weekly or monthly

gold monetization and gold discipline gold and its price have emerged as frequent topics of both academic and government debate 2 public attention focused on the gold market since gold s price began fluctuating violently in 1980 and 1981 has turned to gold as a possible means of removing some discretion inherent in the current fiat money system since lack of adherence to monetary rules can lead to problems of dynamic policy inconsistency academic economists have begun seriously to reconsider monetary standards based either on gold or on some other commodity as politically feasible methods of establishing rules 3

the dependence between hourly prices and trading volume this study provides evidence on joint characteristics of hourly common stock trading vol ume and returns on the new york stock exchange average volume traded shows signifi cant differences across trading hours of the day and across days of the week average returns differ across hours ofthe day and to some extent across days ofthe week there is a strong contemporaneous relation between trading volume and returns and also a rela tion between trading volume and returns lagged up to four hours furthermore the trading volume returns relation is steeper for positive returns than for nonpositive returns

effects of market reform on the trading costs and depths of nasdaq stocks the relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate on january 20 1997 the securities and exchange commission began implementing reforms that would permit the public to compete directly with nasdaq dealers by submitting binding limit orders additionally superior quotes placed by nasdaq dealers in private trading venues began to be displayed in the nasdaq market we measure the impact of these new rules on various measures of performance including trading costs and depths our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality

modelling companies debt and dividend decisions with company accounts data reliable empirical models of company financial decisions have proved hard to construct using aggregate data this paper uses company specific data drawn from the published accounts of a large sample of uk companies to estimate a model of debt and dividend decisions an attempt is made to assess the relative importance of costs of funds the tax system the balance sheet and profitability of the company and of statutory controls in determining these key financial decisions diversity of behaviour is analysed by allowing for unobserved company specific effects and by examining subsets of the full sample

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

similarities and differences in small and large corporation beliefs about capital structure policy theoretical researchers posit many factors that affect a firm s capital structure decisions theory also suggests that these influences will have different impacts on small and large firms however empiricists face difficulties in testing these hypotheses due to problems of quantifying the motivations expectations and preferences prevalent in the various theories

does debt affect firm value in taiwan a panel threshold regression analysis this article analyses whether leverage affects firm value and does so using a panel of 196 taiwanese listed companies during the 13 year 1993 2005 period we employ an advanced panel threshold regression model to test whether there is a threshold debt ratio which causes there to be asymmetrical relationships between debt ratio and firm value we adopt tobin s q as proxy for firm value we find that there are two threshold effects between debt ratio and firm value and these are 9 86 and 33 33 when the debt ratio is less than 9 86 tobin s q i e firm value increases by 0 0546 with an increase of 1 in the debt ratio when the debt ratio is between 9 86 and 33 33 we find tobin s q increases by only 0 0057 with an increase of 1 in the debt ratio but when the debt ratio is greater than 33 33 there is no relationship between debt ratio and firm value we therefore conclude that there must be a threshold debt ratio of less than 33 33 at which point firm value stops increasing these resul

market structure and the intraday pattern of bid ask spreads for nasdaq securities this article examines the intraday pattern of bid ask spreads among nasdaq stocks we find that spreads are relatively stable throughout the day but narrow significantly near the close this contrasts with the u shaped pattern for nyse stocks reported by brock and kleidon and mcinish and wood we attribute these divergent patterns to structural differences between specialist and dealer markets the wider spreads for nyse stocks near periods of market closure may reflect the market power of specialists the decline in spreads near the close for nasdaq stocks is consistent with inventory control by individual dealers copyright 1995 by university of chicago press

search and collusion in electronic markets we examine the impact of reduced search costs on prices of commodity products in electronic marketplaces conventionally reduced consumer search costs may be expected to engender stronger price competition between firms resulting in lower prices and improved consumer welfare this notion was formalized in stahl 1989 oligopolistic pricing with sequential consumer search american economic review vol 79 no 4 pp 700 712 in a model of static firm competition in this paper we show that these standard welfare conclusions may be neutralized or reversed in a dynamic environment we focus on self enforcing collusion by firms and characterize the conditions under which collusive equilibria exist we show that less costly consumer search can facilitate firms abilities to collude resulting in higher prices and reduced consumer welfare even with imperfect or no monitoring by sellers of each other s prices if the same technology that eases consumer search also allows firms to monitor each other s prices more easily then firms can more easily detect cheating on a collusive price arrangement allowing an even greater scope for collusion this raises antitrust concerns with respect to the electronic marketplace and suggests that at least some of the anticipated competitive gains from electronic market systems may be difficult to realize

law enforcement and firm financing theory and evidence this paper investigates the economic effects on firms policies of differences in law enforcement we find that in judicial districts where trials are longer bank financing is more costly and firms are smaller however we do not find any significant relation between law enforcement and firms leverage ratio we rationalize our results within a two region dynamic general equilibrium model with asymmetric information and collateralized credit contracts we find that a stronger enforcement of creditors rights not only improves credit conditions partial equilibrium effect but also fosters individual capital accumulation general equilibrium effect in line with this theoretical prediction we find a positive relation between individual savings and quality of legal enforcement

sterilization costs and exchange rate targeting abstract we examine the movements of exchange rates and capital inflows in an environment where an optimizing central bank pursuing the joint goals of inflation and output targeting engages in costly sterilization activities our results predict that when faced with increased sterilization costs the central bank will choose to limit its sterilization activities allowing target variables such as the nominal exchange rate to adjust we then test the predictions of a linearized version of the saddle path solution to the model for a cross country panel of developing countries we use ols iv and gmm specifications to allow for the endogeneity of capital inflows our results confirm that monetary policy does respond to sterilization costs

balance of payments crises in a cash in advance economy the author shows that a flexible prices sidrauski type model with a cash in advance constraint is capable of depicting some of the phenomena associated with a balance of payments crisis like the onesrecently observed in argentina and mexico current accounts deficits and appreciation of the real exchange rat e it is also shown that these phenomena become exacerbated as the rate of devaluation before the crisis occurs becomes smaller copyright 1987 by ohio state university press

policy watch did nasdaq market makers implicitly collude this paper chronicles the research that led to the conclusion that nasdaq marketmakers implicitly colluded to maintain supracompetitive spreads christie and schultz 1994 the paper provides a brief description of the differences between a dealer and an auction market and highlights the result that nasdaq marketmakers quoted a majority of large issues exclusively in even eighths the paper then provides a personalized description of the events that soon followed including the publicity surrounding the article the ensuing antitrust investigation by the department of justice and the abandonment of these agreements once the practice was disclosed

bargaining and search with recall a two period model with complete information two standard results of previous bargaining models state that delay is generally not expected to occur under complete information and bargaining outcome depends crucially on the bargainers intrinsic characteristics that determine their reservation prices and in general bargainers with better reservation prices tend to get better outcomes this paper considers a bilateral bargaining problem with complete information in which one of the bargainers the buyer is allowed to search while bargaining more importantly we assume that the buyer is allowed to recall past outside offers we find that quite contrary to the standard results of previous complete information bargaining models complete information renders no guarantee for immediate resolution of bargaining and the effect of changing the buyer s search cost on each player s bargaining outcome is unpredictable the major driving force of these two results is the assumption that the buyer can recall past outside offers

on the asset substitution problem in their seminal paper modigliani and miller 11 12 demonstrate that if capital markets are perfect and investment policy is held constant the market value of the firm is independent of its financial decisions furthermore if capital markets are perfect stockholders have incentive to choose the investment policy which maximizes the market value of the firm see 6 motivated by this assumption the firm has been viewed as a black box namely as one homogeneous unit whose clear objective is to maximize its market value however in a growing body of recent literature see 1 2 7 9 13 and 14 researchers recognize that the firm in an imperfect capital market is a collection of groups whose interests can and do conflict jensen and meckling 9 study the roles of three important groups the owner manager the stockholders and the bondholders focusing on the potential costs resulting from divergence of interests among them they provide a theory of optimal capital structure in terms of reducing the costs of these conflicts

collusion under monitoring of sales collusion under imperfect monitoring is explored when firms prices are private information and their quantities are public information such an information structure is consistent with several recent price fixing cartels such as those in lysine and vitamins for a class of symmetric oligopoly games it is shown that symmetric equilibrium punishments cannot sustain any collusion an asymmetric punishment is characterized that does sustain collusion and it has firms whose sales exceed their quotas compensating those firms with sales below their quotas in practice cartels could have performed such transfers through sales among the cartel members

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

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

multimarket contact and collusive behavior traditional analyses of industrial behavior typically link the exercise of market power in an industry to internalfeatures such as demand conditions concentration and barriers to entry nevertheless some economists have remained concerned that external factors such as contact across markets may also play a significant role in determining the level of competitiveness in any particular industry in this article we examine the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition we isolate conditions under which multimarket contact facilitates collusion and show that these collusive gains are achieved through modes of behavior that have been identified in previous empirical studies of multimarketfirms

debt agency costs and industry equilibrium we show that risk characteristics of projects cash flows are endogenously determined by the investment decisions of all firms in an industry as a result in reasonable settings financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium without taxes capital structure is irrelevant for individual firms despite its effect on the equityholders incentives but the maximum total amount of debt in the industry is determinate allowing for a corporate tax advantage of debt capital structure becomes relevant but firms are indifferent between distinct alternative debt levels the effect of firms financial structures on subsequent investment and output decisions has recently received considerable attention in the finance literature the central insight that equityholders control the firm s investment and production decisions and in general do not maximize the value of a levered firm has been applied to the analysis of risk shifting underinvestment and firms abilities to enter into optimal contracts with their customers existing models of firms financial structures and their effect on investment decisions are generally based on a single firm framework and do not take into account the relationship between project cash flows and the investment decisions of all firms in the industry 2 in this paper we allow the distribution of investment projects within an industry to adjust and show that this generates new insights and reverses several key results of single firm agency cost models the new predictions conform with well documented

when does corporate venture capital investment create firm value abstract over the past decade billions of dollars have been invested by established companies in entrepreneurial ventures what is often referred to as corporate venture capital yet there is little systematic evidence that corporate venture capital investment creates value to investing firms scholars have suggested that established firms face underlying challenges when investing corporate venture capital namely structural deficiencies inherent in corporate venture capital may inhibit financial gains however firm value may still be created as a result of other benefits from investing primarily providing a window onto novel technology in this paper we propose that corporate venture capital investment will create greater firm value when firms explicitly pursue corporate venture capital to harness novel technology using a panel of cvc investments we present evidence consistent with our proposition the findings are robust to various specifications and remain unchanged even after controlling for unobserved heterogeneity in investing firms our results have important implications for corporate venture capital in particular and technology strategy in general

price discovery in the u s treasury market automation vs intermediation this paper examines the contribution to price discovery by electronic and voice based trading systems in the u s treasury market evidence shows that the electronic trading system has more price discovery and that trading automation increases the speed of incorporating information into prices however human trading generates significant price discovery though its volume is low the relative contribution of a trading system to price discovery depends on liquidity volatility volume trade size and order imbalance the voice based trading system contributes more to price discovery when trade size is large and liquidity is low these findings provide important implications for the design of electronic markets for securities with different characteristics and trading environments this paper was accepted by wei xiong finance

self fulfilling risk predictions an application to speculative attacks abstract we show that changing market beliefs about currency risk can generate a self fulfilling speculative attack on a fixed exchange rate the attack does not require a later change in policies to make it profitable we illustrate this point by introducing an endogenous risk premium into a first generation model of a speculative attack the model is further modified to take account of sterilization debt financed fiscal deficits and anticipatory price setting behavior we use the model to interpret the 1994 mexican peso crisis

the empirics of international currencies network externalities history and persistence using a new database for the late nineteenth century when the pound sterling was the world s leading international currency this article provides evidence on the empirical determinants of international currency status we report evidence in favour of the search theoretic models to international currencies using a microeconomic model of currency choice we provide empirical support to strategic externalities we find strong confirmation of the existence of persistence but reject the view that the international monetary system was subject to pure path dependency and lock in effects suggesting that even in the absence of wwi the usd was bound to overtake sterling

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

price dispersion and differentiation in online travel an empirical investigation previous research has examined whether price dispersion exists in theoretically highly efficient internet markets however much of the previous work has been focused on industries with low cost and undifferentiated products in this paper we examine the presence of price dispersion and product differentiation using data on the airline ticket offerings of online travel agents otas we find that different otas offer tickets with substantially different prices and characteristics when given the same customer request some of this variation appears to be due to product differentiation different otas specialize by systematically offering different trade offs between ticket price and ticket quality minimizing the number of connections matching requested departure and return time however even after accounting for differences in ticket quality ticket prices vary by as much as 18 across otas in addition otas return tickets that are strictly inferior to the ticket offered by another ota for the same request between 2 2 and 28 of the time overall this suggests the presence of both price dispersion and product differentiation in the online travel market

information transmission between the nasdaq and asian second board markets abstract in the 1980s and early 1990s the nasdaq s success helped to prompt singapore sesdaq japan jasdaq taiwan taisdaq and south korea kosdaq to set up or formalize their own second board markets in 1999 malaysia mesdaq and hong kong gem followed suit given the growing importance of these second board markets we examine whether there is any evidence of spillovers from nasdaq returns and volatilities to asian second board market returns and volatilities after controlling for spillovers from the nyse and whether these cross country spillovers are strong relative to domestic spillovers from the corresponding main board markets we employ egarch models dynamic causality tests and var based forecast error decompositions using daily data of a recent sample period that includes the asian financial crisis of 1997 and continues until april 20 2001 there is strong evidence of lagged returns and volatility spillovers from the nasdaq market to the asian second board markets when we exclude contemporaneous main board market returns there is also strong evidence of contemporaneous and lagged returns and volatility spillovers from the local main board markets to the corresponding second board markets however even in the presence of contemporaneous main board market returns there are substantial spillovers from the lagged nasdaq returns and volatilities to asian second board market returns and volatilities these findings are not sensitive to whether we use us dollar based data or local currency based data given the difference in the trading hours between the nasdaq and asian stock markets we use available intra day return data and canadian return data the findings seem quite robust there is substantial information spillover from the nasdaq to the asian and canadian second board markets these findings indicate the existence of a substantial cross country industry effect or meteor shower effect as well as a domestic market effect or heat wave effect and imply that both country diversification and industry diversification are important