contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

the optimal lag selection and transfer function analysis in granger causality tests abstract the conventional selection of lag lengths through the final prediction error criterion is shown to be inadequate in the test of granger causality in this paper lag terms are selected optimally in the most efficient forecast equations that are obtained from univariate and transfer function analyses the reduction in the forecasting error variances from the two analyses is used to test granger causality the new procedure is applied to test for the causality between the industrial production and the leading indicator and that between the consumer price index and the producer price index in the united states

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

a two player competitive discrete location model with simultaneous decisions in this paper we will describe and study a competitive discrete location problem in which two decision makers players will have to decide where to locate their own facilities and customers will be assigned to the closest open facilities we will consider the situation in which the players must decide simultaneously unsure about the decisions of one another and we will present the problem in a franchising environment most problems described in the literature consider sequential rather than simultaneous decisions in a competitive environment most problems consider that there is a set of known and already located facilities and new facilities will have to be located competing with the existing ones in the presence of more than one decision maker most problems found in the literature belong to the class of stackelberg location problems where one decision maker the leader locates first and then the other decision maker the follower locates second knowing the decisions made by the first these types of problems are sequential and differ significantly from the problem tackled in this paper where we explicitly consider simultaneous non cooperative discrete location decisions we describe the problem and its context propose some mathematical formulations and present an algorithmic approach that was developed to find nash equilibria some computational tests were performed that allowed us to better understand some of the features of the problem and the associated nash equilibria among other results we conclude that worsening the situation of a player tends to benefit the other player and that the inefficiency of nash equilibria tends to increase with the level of competition

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

finding all pure strategy nash equilibria in a planar location game in this paper we deal with a planar location price game where firms first select their locations and then set delivered prices in order to maximize their profits if firms set the equilibrium prices in the second stage the game is reduced to a location game for which pure strategy nash equilibria are studied assuming that the marginal delivered cost is proportional to the distance between the customer and the facility from which it is served we present characterizations of local and global nash equilibria then an algorithm is shown in order to find all possible nash equilibrium pairs of locations the minimization of the social cost leads to a nash equilibrium an example shows that there may exist multiple nash equilibria which are not minimizers of the social cost

imperfect information and cross autocorrelation among stock prices i develop a model to explain why stock returns are positively cross autocorrelated when market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks which contain marketwide information the pricing error of one stock is correlated with the other signals as market makers adjust prices after observing true values or previous price changes of other stocks stock returns become positively crossautocorrelated if the signal quality differs among stocks the cross autocorrelation pattern is asymmetric i show that both own and cross autocorrelations are higher when market movements are larger

funding liquidity and equity liquidity in the subprime crisis period evidence from the etf market using index and financial exchange traded funds etfs this study explores the relation between funding liquidity and equity liquidity during the subprime crisis period our empirical results show that a higher degree of funding illiquidity leads to an increase in bid ask spread and a reduction in both market depth and net buying imbalance such findings indicate that an increase in funding liquidity can improve equity liquidity with a stronger effect for the financial etfs than for the index etfs our study provides a better overall understanding of the effect of the liquidity supplier funding constraint during the subprime crisis period

the effect of monetary changes on interest rates a comment singh balvir helmar drost and ramesh c kumar an empirical evaluation of the relative the permanent income and the life cycle hypotheses economic development and cultural change 26 jan 1978 281 305 singh balvir a and aman ullah the consumption function the permanent income versus the habit persistence hypothesis this review 58 feb 1976 96103 u s department of commerce income expenditures and wealth the statistical a bstrac t of the u s 1942 national product and income historical statistics of the united states colonial times to 1970 bicentennial ed part i washington d c 1975 225

information technology and time based competition in financial markets this paper studies time based competition in imperfect securities markets linking it investment decisions information processing delays and trading strategies at the it investment stage traders trade off the cost of it against their anticipated trading profits at the trading stage each trader devises a trading strategy based on his new information while taking into account the impact of both his own trades and those of other traders in the market our results illustrate how traders react to market imperfections due to trading costs and information processing delays and how superior traders convert a timeliness advantage into higher trading profits they also shed light on the relationship between the price adjustment process and traders information processing delays timeliness imposes an interesting structure on trader competition traders with longer information processing delays trade less frequently submit smaller orders and enjoy lower profits per trade our analysis of traders it investment decisions demonstrates how factors such as it costs number of traders and the frequency and nature of new information affect the level of it investments we further illustrate how improved it infrastructure translates into competitive advantage

trading and pricing in upstairs and downstairs stock markets we provide empirical evidence on the economic benefits of negotiating trades in the upstairs trading room of brokerage firms relative to the downstairs market using helsinki stock exchange data we find that upstairs trades tend to have lower information content and lower price impacts than downstairs trades this is consistent with the hypotheses that the upstairs market is better at pricing uninformed liquidity trades and that upstairs brokers can give better prices to their customers if they know the unexpressed demands of other customers we find that these economic benefits depend on price discovery occurring in the downstairs market copyright 2002 oxford university press

the effect of time induced stress on financial decision making in real markets the case of traffic congestion abstract we study the role of stress induced by time constraints on investor decision making in real financial markets we use unexpected traffic congestion as a stress trigger our dependent variable is the slope of the implied volatility function ivf of options on russian trading system index rtsi futures at the left hand side of the volatility smile cf bollen and whaley 2004 controlling for relevant factors we find that this slope at the opening of the main trading session is higher subsequent to morning traffic jams suggesting that investors under stress assign higher weights to extreme loss scenarios this effect is economically exploitable before transaction costs

trading halts and market activity an analysis of volume at the open and the close this paper analyzes how the daily opening and closing of financial markets affect trading volume we model the desire to trade at the beginning and end of the day as a function of overnight return volatility nyse data from 1933 88 indicate that closing volume is positively related to expected overnight volatility while volume at the open is positively related to both expected and unexpected volatility from the previous night we interpret the symmetric response of trading at the open and the close to expected volatility as being due to investor heterogeneities in the ability to bear risk when the market is closed this desire of investors to trade prior to market closings indicates a cost of mandating marketwide circuit breakers

the informational content of implied volatility implied volatility is widely believed to be informationally superior to historical volatility because it is the markets forecast of future volatility but for s p 100 index options the most actively traded contract in the united states we find implied volatility in aggregate and across subsamples separated by maturity and strike price implied volatility has virtually no correlation with future volatility and it does not incorporate the information contained in recent observed volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a note on price noises and their correction process evidence from two equal payoff government bonds abstract the study offers the most direct evidence to date on price noises in call auctions and their correction we examine a unique sample of two identical securities two equal payoff israeli government bonds that were traded on separate yet almost simultaneous auctions on the tel aviv stock exchange tase the prices of the bonds were equal on average however on most of the sample days there were price differences between the bonds various estimates suggest that the price noise in one bond is practically uncorrelated with that of the other and both disappear by the end of the next day auction

how trading institutions affect financial market performance some laboratory evidence i introduction trading institutions vary considerably across contemporary financial markets 1 but most can be classified into one of two basic types the continuous double auction da allows traders to submit public offers to buy or to sell and to accept other traders offers at any moment in time the double auction institution offers immediacy but non uniform transaction prices the other basic trading institution the clearinghouse ch gathers offers and clears them at a unified price at a pre specified time it sacrifices immediacy for uniform transaction prices 2 the two types of institutions have co existed and evolved for centuries but now are emerging in new electronic versions market participants and policy makers would like to know which institution or variant or combination is most efficient but theoretical and empirical work to date provides little guidance this paper reports on a series of laboratory asset markets experiments designed to compare variants of the double auction and clearinghouse trading institutions the markets are small usually with eight or nine traders but the traders are profit motivated and experienced with the trading institutions the traded asset has uncertain market value and traders receive useful but inconclusive private information they can only learn the asset s true value during the course of trade laboratory markets offer several advantages for empirical study of financial market institutions first private information is observable even controllable in the laboratory and therefore the investigator can directly measure market efficiency 3 second the complexity of the environment can be varied systematically in the laboratory and its effects on market performance can be separated from the effects of the market institution and other forces finally the market institution itself is controllable in the laboratory so it is possible to make valid causal inferences on how the market institution shapes market performance i begin with a survey of relevant literature and other preliminaries in the rest of this section section ii outlines the laboratory procedures the creation of trading environments of varying complexity the electronic implementation of the clearinghouse and double auction trading institutions the computation of theoretical benchmark prices and allocations and the measurement of market performance section iii collects the results following an illustrative account of a double auction trading period and a clearinghouse trading period i use descriptive statistics to summarize market performance in each of the thirty nine experiments the main conclusions are based on statistical comparisons of market performance across alternative market institutions the clearinghouse institution does surprisingly well it delivers greater market depth than the double auction discovers prices at least as efficiently and produces final allocations almost as efficient as the double auction the main institutional variants examined in this paper concern the amount of information made public regarding order placement orderflow the data suggest that public display of the orderflow enhances double auction efficiency but may impair clearinghouse efficiency a study of trading volume shows higher volume in the double auction in both institutions volume increases when important private news arrives and when the trading period is about to end the paper concludes with a brief summary and discussion of the results a companion paper friedman 1991 considers the effects of awarding various privileges to some but not all traders copeland and friedman 1987 1991 provide useful background information on laboratory procedures and computerized double auction markets instructions for the current experiments are available on request the need for empirical work a skeptic might argue that empirical work is unnecessary the mere fact that the double auction and clearinghouse institutions both persist in major financial markets implies that both are highly efficient because a more efficient institution would displace less efficient institutions

systemic co jumps abstract the simultaneous occurrence of jumps in several stocks can be associated with major financial news triggers short term predictability in stock returns is correlated with sudden spikes of the variance risk premium and determines a persistent increase decrease of stock variances and correlations when they come along with bad good news these systemic events and their implications can be easily overlooked by traditional univariate jump statistics applied to stock indices they are instead revealed in a clearly cut way by using a novel test procedure applied to individual assets which is particularly effective on high volume stocks

widening price limit effects evidence from an emerging stock market abstractthis study investigates the impact of the widening of price limits on the taiwan stock exchange from 7 to 10 by comparing the differences in performance with the different price limit l

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

round the clock market efficiency and home bias evidence from the international japanese government bonds futures markets abstract this paper examines how information is processed between almost identical international futures markets london liffe and tokyo tse jgb futures in these markets variations in open to open changes are virtually the same as those of close to close changes suggesting that information is transmitted efficiently across markets with small opening pricing errors the overall results confirm market efficiency around the clock yet the intraday u shaped patterns in volume volatility of the london jgb futures suggest home bias in international investments indicating a less global view of trading than expected specifically at the liffe open london investors rush to rebalance portfolios instead of doing so at the tse close which is only one hour before the liffe opens

tick size share prices and stock splits minimum price variation rules help explain why stock prices vary substantially across countries and other curiosities of share prices companies tend to split their stock so that the institutionally mandated minimum tick size is optimal relative to the stock price a large relative tick size provides an incentive for dealers to make markets and for investors to provide liquidity by placing limit orders despite its placing a high floor on the quoted bid ask spread a simple model suggests that idiosyncratic risk firm size and visibility of the firm affect the optimal relative tick size and thus the share price in stock markets around the world the average price per share differs substantially the median u s stock for example sells for about 40 a typical london stock sells for about 5 7 50 and a typical hong kong share is about 2 furthermore when stock prices rise above a country s usual trading range firms often split their stocks to restore prices to that range why are these price ranges so different among countries these trading ranges can be remarkably stable over time during the half century from 1943 to 1994 the s p composite index increased over 1 500 percent yet the average new york stock exchange nyse share price was

intraday price reversals for index futures in the us and hong kong abstract we observe intraday price reversals following large price changes at the opening of the s p 500 futures market and the hsi futures market we note that the magnitude of subsequent price reversals is positively related to the initial price changes and that the price reversals are not caused by a bid ask spread or by panic among investors we also note that such price reversals can be exploited to give rise to profitable opportunities after transaction costs even though these may not be very significant this study shows that investor overreaction may be a universal phenomenon and irrational investor behavior like overreaction may also exist among groups of sophisticated investors

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

volume volatility and new york stock exchange trading halts trading halts increase rather than reduce both volume and volatility volume volatility in the first full trading day after a trading halt is 230 percent 50 to 115 percent higher than following pseudohalts nonhalt control periods matched on time of day duration and absolute net of market returns these results are robust over different halt types and news categories higher posthalt volume is observed into the third day while higher posthalt volatility decays within hours the extent of media coverage is a partial determinant of volume and volatility following both halts and pseudohalts but a separate halt effect remains after controlling for the media effect in the wake of the 1987 market break a number of commentators including the presidential task force on market mechanisms recommended the establishment of circuit breaker mechanisms the primary argument supporting circuit breakers both price limits and trading halts is that nontrading periods provide an opportunity for normal information transmission in times of market duress proponents of circuit breakers claim that during major price changes there can be a breakdown in the transmission of information between the trading floor and market participants therefore the primary function of a circuit breaker should be to reinform participants greenwald and stein 1988 p 17 by lowering informational asymmetries between traders halts could permit the orderly emergence of a new consensus price but would informative trading halts succeed many academics are openly suspicious of any kind of market interference and assume that trading halts are guilty until proven innocent grossman 1990 p 3 for example argues that the closing of markets merely prevents consenting adults from carrying out their desires on the floor of the stock exchange not only do halts impose a liquidity cost on traders but studies suggest that information will not be as

slow moving capital we study three cases in which specialized arbitrageurs lost significant amounts of capital and as a result became liquidity demanders rather than providers the effects on security markets were large and persistent prices dropped relative to fundamentals and the rebound took months while multi strategy hedge funds who were not capital constrained increased their positions a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm not just relative to outside investors can lead to capital constraints for trading desks with mark to market losses our findings suggest that real world frictions impede arbitrage capital this abstract was borrowed from another version of this item

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

the value of trading consolidation evidence from the exercise of warrants we study the effect of trading consolidation by examining the response of liquidity and stock price to the exercise of deep in the money corporate warrants this enables a relatively clean test of the value of trading consolidation the exercise at the warrant expiration is fully anticipated and has no information content an effect can come from the value of trading consolidation that improves liquidity indeed we find that liquidity and stock prices both increase significantly at warrant expiration further the price increase is positively related to the pre exercise extent of fragmentation to post exercise improvement in stock liquidity and to the proportional increase in the number of shares following the warrant exercise

judgemental overconfidence self monitoring and trading performance in an experimental financial market we measure the degree of overconfidence in judgment in the form of miscalibration i e the tendency to overestimate the precision of one s information and self monitoring a form of attentiveness to social cues of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information miscalibrated traders underestimating the conditional uncertainty about the asset value are expected to be especially vulnerable to the winner s curse high self monitors are expected to behave strategically and achieve superior results our empirical results show that miscalibration reduces and self monitoring enhances trading performance the effect of the psychological variables is strong for men but non existent for women

preferred habitat for liquidity in international short term interest rates abstract risk shifting window dressing and a preferred habitat for liquidity have been offered as possible explanations as to why us money market rates are higher before the year end than afterwards the two hypotheses differ in the timing of the rate decline at the year end and the evidence on the timing of the decline supports the preferred habitat hypothesis in us money markets this paper extends this line of research to the behavior of international short term interest rates at year ends and quarter ends using london interbank offer rates libor for 11 different currencies the results suggest that the behavior of libor for five currencies the us dollar euro japanese yen swiss franc and german mark is consistent with year end or quarter end preferred habitats for liquidity other currencies do not demonstrate consistently distinct patterns in turn of the year and turn of the quarter yields none of the results provides any support for risk shifting window dressing

the contribution of market makers to liquidity and efficiency of options trading in electronic markets this paper examines the contribution of market makers to the liquidity and the efficiency of the options market in a unique setup of an order driven computerized trading system in which market makers and other participants operate under equitable conditions the main findings are 1 liquidity increased a 60 increase in trading volume and a 35 decrease of bid ask spreads 2 the efficiency of shekel euro options trading improved deviations from put call parity decreased significantly by 12 and skewness decreased by about 30 we also find that the net cost to the exchange is out weighted by the benefit to the trading public and that the presence of market makers encouraged trading between other participants far beyond their own trading 2005 elsevier b v all rights reserved

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

transitory price changes and price limit rules evidence from the tokyo stock exchange we compare the volatility of 24 hour returns computed from the opening and closing prices of a diverse sample of tokyo stock exchange tse stocks we find that volatility at the open is greater than volatility at the close only for the most actively traded tse stocks daytime and overnight return covariances suggest that the volatility patterns are explained by the effect of implicit bid ask spreads at the open and partial price adjustment at the close both of which are related to the intensity of trading our results challenge the view that open to open returns are more volatile than close to close returns for stocks in general and are consistent with the hypothesis that tse price limit rules have a significant impact on the dynamics of security prices

measurement effects and the variance of returns after stock splits and stock dividends this article examines the relation between two factors affecting stock returns the bid ask spread and price discreteness and the increase in return variance after ex dates of stock splits and stock dividends controlling for these effects the variance of daily returns still increases significantly the variance of weekly returns also increases significantly and the variance of returns for a control sample of nonsplitting firms shows no significant increase variance ratio tests show that bid ask errors are small for these stocks and therefore cannot explain the large increase in variance spreads and price discreteness do not explain increased variance after stock distributions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

covered interest arbitrage profits the role of liquidity and credit risk we study the profitability of covered interest parity cip arbitrage violations and their relationship with market liquidity and credit risk using a novel and unique dataset of tick by tick firm quotes for all financial instruments involved in the arbitrage strategy the empirical analysis shows that positive cip arbitrage deviations include a compensation for liquidity and credit risk once these risk premia are taken into account small arbitrage profits only accrue to traders who are able to negotiate low trading costs the results are robust to stale pricing and the nonsynchronous trading occurring in the markets involved in the arbitrage strategy

limit orders depth and volatility evidence from the stock exchange of hong kong we investigate the role of limit orders in the liquidity provision in a pure orderdriven market results show that market depth rises subsequent to an increase in transitory volatility and transitory volatility declines subsequent to an increase in market depth we also examine how transitory volatility affects the mix between limit orders and market orders when transitory volatility arises from the ask bid side investors will submit more limit sell buy orders than market sell buy orders this result is consistent with the existence of limit order traders who enter the market and place orders when liquidity is needed

critical infrastructure protection using secrecy a discrete simultaneous game abstract in this research critical infrastructure protection against intentional attacks is modeled as a discrete simultaneous game between the protector and the attacker to model the situation that both players keep the information of their resource allocation secret we prove that keeping the information regarding protection strategies secret can obtain a better effect of critical infrastructure protection than truthfully disclosing it solving a game theoretic problem even in the case of two players has been known to be intractable to deal with this complexity after proving that pure strategy nash equilibrium solutions do not exist for the proposed simultaneous game a new approach is proposed to identify its mixed strategy nash equilibrium solution

market behavior in a clearing house one of the most fundamental market mechanisms is the clearing house where orders are accumulated over time and the market is cleared periodically the issue addressed in this study is the statistical behavior of the market under this neutral mechanism in the framework of a tractable stochastic model which captures the underlying uncertainties and indivisibilities in the demand and supply schedules applying renewal theory we derive closed form results for the behavior of prices and quantities and pursue the implications of the possibility of no trade and the multiplicity of market clearing prices

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

trading structure and overnight information a natural experiment from the tel aviv stock exchange abstract a unique data set from the tel aviv stock exchange tase is used to study the effect of trading mechanisms on stock return volatility the tase represents a natural experiment which allows separation of the overnight information effect from the trading mechanism effect the data span a time period in which the order of the trading mechanisms a sequential continuous mechanism and a call auction was switched since overnight information should impact opening prices equally across periods this affords an unparalleled opportunity to examine the trading mechanism effect without the confounding effect of the non trading period this paper finds that the null that opening variances equal closing variances cannot be rejected for either period further the tests cannot reject null that the ratio of opening to closing return variances is equal across periods this suggests that the trading mechanisms on the tase do not differ in their effect upon return volatility

a simple measure of price adjustment coefficients one measure of market efficiency is the speed with which prices adjust to new information we develop a simple approach to estimating these price adjustment coefficients by using the information in return processes this approach is used to estimate the price adjustment coefficients for firms listed on the nyse and the amex as well as for over the counter stocks we find evidence of a lagged adjustment to new information in shorter return intervals for firms in all market value classes and some support for the proposition that prices adjust much more slowly and with more noise for smaller firms

bid ask spreads and volatility estimates the implications for option pricing abstract this paper re examines the variance related mispricing exhibited by the black scholes model by accounting for the effects of bid ask spreads on the estimation of the variance of returns on a security it is shown that volatility estimates based on observed sequences of transaction prices overestimate the true volatility of returns on a security with the magnitude of the overestimation being an increasing function of the level of the volatility the paper then provides empirical tests of the proposition that the variance related bias exhibited by the black scholes model is due to this misestimation of volatility the results indicate that although the misestimation is systematically related to the variance it is not of sufficient magnitude to explain the volatility bias exhibited by black scholes model

market quality changes in the london stock market this paper examines the impact that the introduction of a closing call auction had on market quality at the london stock exchange using estimates from the partial adjustment with noise model of amihud and mendelson amihud y mendelson h 1987 trading mechanisms and stock returns an empirical investigation journal of finance 42 533 553 we show that opening and closing market quality improved for participating stocks when we stratify our sample securities into five groups based on trading activity we find that the least active securities experience the greatest improvements to market quality a control sample of stocks are not characterized by discernable changes to market quality

short sales and speed of price adjustment evidence from the hong kong stock market abstract we present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private public firm specific information but also market wide information shortable stocks are characterized by weaker trade continuity and stronger quote reversals they adjust faster to new information than non shortable counterparts these findings remain robust even in an up market condition in which short sales are not binding the amount of information incorporated in each trade is also significantly higher for shortable than non shortable stocks in both up and down market conditions after controlling for firm size trading volume liquidity price and option trading short sales stand out as one of the significant factors that speed up the price adjustment

volatility increases subsequent to nyse and amex stock splits the post split increase in daily returns volatility is less for amex stocks than for nyse stocks the exchange trading location is a significant factor in explaining the volatility shift even after stock price and firm size are considered furthermore when measured on a weekly basis there is no increase in amex stocks returns volatility these results suggest that measurement errors created by bid ask spreads and the 1 8 effect and also one or more of the elements that make the nyse different from the amex explain why the estimated volatility of daily stock returns increases after the ex split date ohlson and penman 1985 provide evidence that nyse stock returns variances increase subsequent to ex stock distribution days for splits of 100 or greater the increase in volatility is independent of the size of the split alnd the post split price seven potential problems that might affect their results are analyzed and rejected 1 ohlson and penman 1985 suggest that the greater post split volatility may be due to the activity of relatively ignorant noisy traders who prefer trading low priced stocks this clientele factor is attributed to black 1986 pg 534 and institutional factors a rather broad category that incorporates measurement problems created by the 1 8 effect and bid ask spreads as possible hypotheses for the post split volatility increase this paper extends ohlson and penman s 1985 analysis to amex stocks exchange listing can serve as a proxy for several real factors that may cause the increase in post split variance many of which are related to the clientele factor and institutional factors cited above if the increase in volatility differs between nyse and amex stocks it will suggest that one or more of the following contributes to the phenomenon

two player simultaneous location game preferential rights and overbidding abstract competitive location problems can be characterized by the fact that the decisions made by others will affect our own payoffs in this paper we address a discrete competitive location game in which two decision makers have to decide simultaneously where to locate their services without knowing the decisions of one another this problem arises in a franchising environment in which the decision makers are the franchisees and the franchiser defines the potential sites for locating services and the rules of the game at most one service can be located at each site and one of the franchisees has preferential rights over the other this means that if both franchisees are interested in opening the service in the same site only the one that has preferential rights will open it we consider that both franchisees have budget constraints but the franchisee without preferential rights is allowed to show interest in more sites than the ones she can afford we are interested in studying the influence of the existence of preferential rights and overbidding on the outcomes for both franchisees and franchiser a model is presented and an algorithmic approach is developed for the calculation of nash equilibria several computational experiments are defined and their results are analysed showing that preferential rights give its holder a relative advantage over the other competitor the possibility of overbidding seems to be advantageous for the franchiser as well as the inclusion of some level of asymmetry between the two decision makers

order imbalance liquidity and market returns traditionally volume has provided the link between trading activity and returns we focus on a hitherto unexplored but intuitive measure of trading activity the aggregate daily order imbalance on the new york stock exchange signed order imbalances increase decrease following market declines rises which reveals that investors are contrarians on aggregate order imbalances in either direction either excess buy or sell orders reduce liquidity market wide returns are strongly affected by contemporaneous and lagged order imbalances market wide returns reverse themselves after high negative imbalance large negative return days the magnitude of this reversal is partially predictable from the level of the imbalance and return even after controlling for aggregate market volume and liquidity market returns are affected by order imbalance

price adjustment delays and arbitrage costs evidence from the behavior of convertible preferred prices price adjustment delays occur between in the money convertible preferred stock prices and common stock prices convertible preferred prices systematically deviate from the prices predicted from their conversion relations with common stocks the price predictability stems from price changes in the underlying common stocks leading the price changes in the convertible preferred stocks by up to nine hours cross sectionally about 70 percent of the variation in the unsigned size of the price deviations is explained by proxies for costs of arbitrage

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

competitive location production and market selection abstract this paper investigates how firms should select their production sites capacities and quantities under rivalry there are assumed to be a finite number of discrete potential location sites and a finite number of discrete markets which may or may not coincide firms first decide either simultaneously or sequentially whether and where to establish a production site the fixed cost of opening a facility and the marginal cost of production both depend on where the facility is located firms then choose capacity and a production quantity for each market prices in each market are determined by the total quantity available at that location via the cournot mechanism this formulation thus addresses multi market oligopolistic spatial competition with heterogeneity in production and logistics costs we then analyze the nash equilibria of the entry game and provide sufficient conditions for the existence of equilibria in the simultaneous entry game at equilibrium firms may not produce for all markets and may have limited market areas however these areas may overlap so that there are multiple suppliers in any market in general there may not be a first mover advantage and early entrants may earn lower profits than later entrants

liquidity and risk management this paper provides a model of the interaction between risk management practices and market liquidity on one hand tighter risk management reduces the maximum position an institution can take thus the amount of liquidity it can offer to the market on the other hand risk managers can take into account that lower liquidity amplifies the effective risk of a position by lengthening the time it takes to sell it the main result of the paper is that a feedback effect can arise tighter risk management reduces liquidity which in turn leads to tighter risk management etc this can help explain sudden drops in liquidity and since liquidity is priced in prices in connection with increased volatility or decreased risk bearing capacity this abstract was borrowed from another version of this item

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

trading and returns under periodic market closures this paper studies how market closures affect investors trading policies and the resulting return generating process it shows that closures generate rich patterns of time variation in trading and returns including those consistent with empirical findings 1 u shaped patterns in the mean and volatility of returns over trading periods 2 higher trading activity around the close and open 3 more volatile open to open returns than close to close returns 4 higher returns over trading periods than over nontrading periods 5 more volatile returns over trading periods than over nontrading periods it also shows that closures can make prices more informative about future payoffs we model a competitive stock market with periodic closures in which investors trade for both allocational and informational reasons we use the model to study how market closures intrinsically affect investors trading behavior and the return generating process the purpose of this analysis is to increase our understanding of the time variation in security trading and returns that are associated with regular market closures such as the intraday and intraweek patterns in stock returns volatility and trading volume we consider a stock market in which the exogenous information flow is homogeneous over time and the market closes periodically when the market is open investors trade the stock either to rebalance their overall portfolio of assets which also includes other illiquid assets or to speculate on future stock payoffs using their private information in particular investors adjust their asset portfolio by trading the stock in order to hedge the risk of illiquid assets we refer to these trades as hedging trades and those motivated by private information as speculative trades when the market is closed hong is from the graduate school of business stanford university and wang is from the sloan school of management massachusetts institute of technology and nber the authors thank jennifer huang for programming assistance and an anonymous referee for many valuable suggestions they also thank glenn ellison john heaton craig holden andrew lo steve slezak jeremy stein rene stulz the editor the nber asset pricing lunch group and par

a tale of three schools insights on autocorrelations of short horizon stock returns this article reexamines the autocorrelation patterns of short horizon stock returns we document empirical results which imply that these autocorrelations have been overstated in the existing literature based on several new insights we provide support for a market efficiency based explanation of the evidence our analysis suggests that institutional factors are the most likely source of the autocorrelation patterns

an examination of stock market return volatility during overnight and intraday periods 1964 1989 this paper examines the variance of hourly market returns during 1964 89 results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter and is significantly greater for intraday versus overnight periods market variance is also shown to change significantly over time rising after nasdaq began in 1971 rising after trading in stock options began in 1973 falling after fixed commissions were eliminated in 1975 rising after trading in stock index futures was introduced in 1982 and falling after margin requirements for stock index futures became larger in 1988 copyright 1990 by american finance association

the effects of stock splits on bid ask spreads this paper examines the effects of stock splits on bid ask spreads for nyse listed companies percentage spreads increase after splits representing a liquidity cost to investors these spread increases are directly related to decreases in share prices following splits and can explain part but not all of the observed increase in return variability after splits the evidence thus suggests a liquidity cost of stock splits that must be weighed against any other perceived benefits of splits such a liquidity cost may validate that stock splits are a signal of favorable information about the firm stock splits have long been a prominent feature in u s financial markets five to ten percent of all amex and nyse firms split in a typical year lakonishok and lev 1987 two potentially conflicting explanations for splits are frequently given first most managers believe baker and gallagher 1980 that splits return share prices to some optimal trading range and improve shareholder liquidity the second explanation is that splits are a costly signal of favorable future prospects for the firm for instance brennan and copeland 1988a show that if stock splits increase liquidity costs to investors such splits can serve as valid signals most empirical studies of the liquidity effects of splits use trading volume copeland 1979 lamoureux and poon 1987 and murray 1985 all conclude that shareholder liquidity decreases after a split based on finding dollar trading volume decreases after splits on the other hand lakonishok and lev 1987 find abnormally high volume in the year preceding a split and abstracting from this abnormal volume that splits are not associated with a change in trading volume the use of volume to measure liquidity is largely motivated by empirical findings of a negative relationship between volume and the bid ask spread e g demsetz 1968 benston and hagerman 1974 and tinic 1972 among others this spread is a direct measure of the cost of liquidity when liquidity is defined hicks 1946 as the ease or rapidity with which a financial instrument can be exchanged for currency despite the importance of the bid ask spread as a liquidity measure only two studies provide evidence on splits and bid ask spreads and they yield conflicting conclusions copeland 1979 studies 162 otc firms for the period 1968 1976 and finds a statistically significant increase in percentage spreads comparing days before and after the ex date murray 1985 studies 100 otc splitting firms for the period 1972 1976 and finds no evidence of a change in percentage spreads relative to a control group

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

price formation on stock exchanges the evolution of trading within the day prior analyses of prices of the nyse and other exchanges find that transitory price volatility is greater at the open of trading than at the close we extend this line of research by using 40 years of hourly dow jones 65 composite price index data to estimate transitory volatility throughout the trading day our results indicate that transitory volatility steadily declines during the trading day we find a similar intraday decline in transitory volatility for a 2 1 2 year sample of the individual firms in the dow jones 30 industrials index the results are consistent with the hypothesis that trading aids price formation and do not support the argument that particular trading mechanisms are the source of greater volatility at the open of trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

calendar anomalies abnormal returns at calendar turning points 1988 calendar anomalies abnormal returns at calendar turning points financial analysts journal vol 44 no 6 pp 28 39

partial adjustment or stale prices implications from stock index and futures return autocorrelations we investigate the relation between returns on stock indices and their corresponding futures contracts to evaluate potential explanations for the pervasive yet anomalous evidence of positive short horizon portfolio autocorrelations using a simple theoretical framework we generate empirical implications for both microstructure and partial adjustment models the major findings are i return autocorrelations of indices are generally positive even though futures contracts have autocorrelations close to zero and ii these autocorrelation differences are maintained under conditions favorable for spot futures arbitrage and are most prevalent during low volume periods these results point toward microstructure based explanations and away from explanations based on behavioral models

autocorrelation of daily index returns intraday to intraday versus close to close intervals abstract first order autocorrelation coefficients of 1 daily equally weighted open to open returns 2 daily equally weighted intraday to intraday returns terminating at each of 23 successive 15 minute intervals of the trading day beginning at 10 15 a m and 3 daily equally weighted and value weighted close to close returns interval 24 are examined a number of findings concerning the behavior of these autocorrelations are reported first order autocorrelation is shown to follow a crude u shaped pattern when plotted against the time of the trading day but there is no significant difference in the behavior of autocorrelations based on open to open returns and 24 hour returns terminating at 10 15 a m evidence that intraday patterns in autocorrelation cannot be explained fully by trading delays also is presented

intraday relationships between volatility in s p 500 futures prices and volatility in the s p 500 index abstract this paper examines the intraday relationships between the volatility of s p 500 futures prices and the volatility of the s p 500 index we calculate variance measures for minute to minute price changes on a daily basis and across 30 minute intervals the empirical results indicate that i futures volatility is greater than index volatility ii volatility increased for both futures prices and the index in absolute terms from 1984 through 1986 iii both futures and index volatility increased directly with futures trading volume and iv index volatility was systematically greater during the first 30 minutes of trading each day than at other times granger tests however reveal no systematic pattern of futures volatility leading index volatility or index volatility leading futures volatility

the feasibility of an index contingent trading mechanism auction or call trading systems are used in many stock exchanges an essential problem in the application of these systems is that orders in one security cannot be conditioned on prices of other securities this paper proposes and analyzes the feasibility of an index contingent trading system in this system limit orders may be conditioned on an index any weighted average of the security prices that is determined simultaneously with the prices in addition to the asset price without any assumptions about traders behavior it is shown that under a reasonable restriction on the structure of the limit orders there is a unique solution vector of prices to any set of orders in all securities moreover the paper presents a quick and simple algorithm that converges to the solution this algorithm is based on an extension of the current mechanisms therefore it can be implemented easily in any computerized auction system

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

random competitive exchange price distributions and gains from trade abstract this paper studies the behavior of a competitive exchange under uncertain preferences and random indivisible endowments we obtain explicit closed form results for the price distribution and expected gains from trade both for case where the market is thin and the number of traders is low and for the asymptotic case where the number of traders tends to infinity we demonstrate that increasing the number of traders reduces price variability and increases the expected gains from trade and that increasing the variability of traders reservation prices increases price variability as well as the expected asymptotic gains from trade