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

measuring the comparative advantage of agricultural activities domestic resource costs and the social cost benefit ratio the domestic resource cost drc indicator is widely used in developing countries to measure comparative advantage and guide policy reforms in this paper we demonstrate that the drc formula is biased against activities that rely heavily on domestic factors land and labor and that a simple social cost benefit scb ratio is a generally superior measure of social profitability the scb uses the same data as the drc in a formula which does not distort profitability rankings the policy significance of improved measurement is shown using data from kenya where the drc overstates the relative profitability of activities using large amounts of tradable inputs

reforms and the real exchange rate the role of pricing to market abstract the paper investigates how endogenous markups affect the extent to which policy reforms can influence international competitiveness in a two country model where trade costs allow for international market segmentation we show that endogenous pricing to market behavior of firms acts as an important transmission channel of the policies by strengthening the degree of competition between firms product market deregulation at home leads to a reduction in domestic markups which generally leads to an improvement in the international competitiveness of the home country conversely the power of competitive tax policy to depreciate the real exchange rate is dampened as domestic firms take the opportunity of the labor tax cut to increase their markups the variability of markups also affects the normative implications of the reforms this indicates the importance of taking into account endogenous pricing to market behavior when intending to correctly evaluate the overall effects of the reforms

transaction costs order placement strategy and existence of the bid ask spread by considering investor order placement strategy this paper demonstrates that transaction costs cause bid ask spreads to be an equilibrium property of asset markets with transaction costs the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote thus with certainty of execution at the counterpart market quote a gravitational pull is generated that keeps counterpart quotes from being placed infinitesimally close to each other an equilibrium spread is defined and its size linked to market thinness implications are noted for the design of a trading system

fragmentation versus consolidation of securities trading evidence from the operation of rule 19c 3 stock exchanges defend their rules requiring members to trade listed stocks on an exchange floor as a means of achieving consolidation of trading which it is argued minimizes trading costs to investors by virtue of the securities and exchange commission s rule 19c 3 however these exchange rules cannot apply to stocks newly listed after april 26 1979 the objective of the securities and exchange commission rule was to end what was viewed as restraint of desirable competition that would more than compensate for any cost saving resulting from consolidation by comparing the cost of trading measured by bid ask spreads and returns variance for the two distinct groups of stocks those listed before april 26 1979 and those listed after we test these competing views we find that rule 19c 3 has not caused any reduction in spreads but may have caused an increase and has had no effect on returns variance

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

policy and competitiveness of agroforestry based technologies for maize production in cameroon an application of policy analysis matrix abstract questions have been raised about the ecological consequences and economic sustainability of exclusive reliance on chemical fertilizers for the rapidly expanding maize production across sub saharan africa alternative agroforestry based natural resource management technologies have been developed for farmers this paper applies the policy analysis matrix pam to analyze the social profitability of agroforestry based technologies for maize production in the highland savanna zone of cameroon and the impacts of policy shifts on the financial competitiveness of maize production under these technologies the paper shows that maize production under agroforestry based systems has high comparative advantage

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

international business cycles the quantitative role of transportation costs we evaluate the quantitative effects of introducing costs of transportation into an international trade model we model these costs through the introduction of international transportation services sector costs of transportation have substantial long run effects on welfare and may impact the pattern of trade however the business cycle effects on relative price movements and on international comovements are less pertinent since decreased trade volatility counteract the effects of transportation cost variations nevertheless it is also shown that costs of transportation combined with delivery lags go a long way towards resolving in particular the international comovement puzzle

market sidedness insights into motives for trade initiation we infer motives for trade initiation from market sidedness we define trading as more two sided one sided if the correlation between the number of buyer and seller initiated trades increases decreases and assess changes in sidedness relative to a control sample around events that identify trade initiators consistent with asymmetric information trading is more one sided before merger news consistent with belief heterogeneity trading is more two sided before earnings and macro announcements with greater dispersion in analyst forecasts and after news with larger announcement surprises we examine the codeterminacy of sidedness bid ask spread volatility number of trades and order imbalance

market making with costly monitoring an analysis of the soes controversy we develop a model of price formation in a dealership market where monitoring of the information flow requires costly effort the result is imperfect monitoring which creates profit opportunities for speculators who pick off stale quotes externalities associated with monitoring give rise to multiple equilibria in which dealers earn strictly positive expected profits we obtain various policy implications a switch to automatic execution can improve or worsen spreads and price discovery depending on the specific equilibrium a reduction in the minimum quoted depth tightens the spread but it reduces price efficiency our analysis is relevant for the soes controversy given that speculators in our model behave as the real world soes bandits our model predicts that soes bandits should trade in stocks with small spreads and that soes bandit activity should widen the spread we provide empirical evidence consistent with these predictions

structural reforms in a debt overhang we assess the eects of reforms in product and labor markets in an econ omy where credit restrictions and long term debt combine to produce a persis tent recession with slow deleveraging following a negative nancial shock we show that reforms that reduce markups in product markets stimulate output and employment even in the short run despite their de ationary eects by favouring a faster recovery of investment and collateral values product mar ket reforms bring forward the end of the deleveraging phase this last eect is missing in the case of labor market reforms the short run eects of which are sensitive to the response of trade ows and to debt maturity

program trading and market volatility a report on interday relationships ten months of daily observations on stock market volatility and program trading on the nyse reveal no relation between volatility and program trading intensity the days on which volatility was high were not systematically the days on which program trading intensity was high this is evident both from casual observation of the data and from analyses of the correlation and regression results there does appear to be however a positive relation between the intensity of dot volume relative to nyse volume and volatility there also appears to be a positive relation between the intensity of non program dot volume relative to nyse volume and volatility this suggests that very volatile days are also days when the retail customer generated dot order flow is large relative to institutional block trades which are not dot delivered

endogenous market structures and the business cycle we propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously the interplay between firms endogenous entry strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables and helps addressing the unemployment volatility puzzle consistently with u s evidence new firms create a large fraction of new jobs and grow faster than more mature firms net firms entry is procyclical and the price mark up is countercyclical

electronic trading system and returns volatility in the oil futures market this paper uses daily brent crude prices to investigate the employment of electronic trading on the returns conditional volatility in the oil futures market after a suitable garch model is established the conditional volatility series are found the bai and perron model is then used to find two significant structural breaks for these conditional volatility series around two implementation dates of electronic trading this result indicates that the change in the trading system has significant impacts on the returns volatility since our estimated second break date is very close to the all electronic trade implementation date moreover the conditional volatility in the all electronic trading period is found to be more dominated by the temporal persistence rather than the volatility clustering effect all these evidence can shed some light for explaining the high relationship between more volatile world oil price and the more popular electronic trade

the microeconomics of market making this paper examines the influence of risk aversion on the pricing policies of a market maker for securities it is shown that a market maker s bid ask spread can be decomposed into a portion for the known limit orders a risk neutral adjustment for expected market orders and a risk adjustment for market order and inventory value uncertainty it is dem onstrated that a risk averse market maker may set a smaller spread than a risk neutral specialist finally this paper demonstrates the pervasive role of inventory in affecting both the placement and size ofthe spread

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

the effects of recent price liberalization on kenyan peri urban dairy a case study using the policy analysis matrix approach abstract when shortages of dairy products became severe in kenya early in 1992 prices of dairy products were de controlled to improve the incentives to producers the impact of that policy change is examined using the policy analysis matrix pam methodology a case study of the marketing chain involving small holder peri urban dairy producers in the nyeri region is considered the price policy reform removed only between 20 per cent and 30 per cent of the negative policy effects on most dairy producers depending on the technology used the market thus remains non competitive and a single large dairy processor was the biggest beneficiary of the policy change

liquidity based competition for order flow we present a microstructure model of competition for order flow between exchanges based on liquidity provision we find that neither a pure limit order market plm nor a hybrid specialist limit order market hm structure is competition proof a plm can always be supported in equilibrium as the dominant market i e where the hybrid limit book is empty but an hm can also be supported for some market parameterizations as the dominant market we also show the possible coexistence of competing markets order preferencing that is decisions about where orders are routed when investors are indifferent is a key determinant of market viability welfare comparisons show that competition between exchanges can increase as well as reduce the cost of liquidity active competition between exchanges for order flow in cross listed securities is intense in the current financial marketplace examples include rivalries between the new york stock exchange nyse crossing networks and ecns and between the london stock exchange the paris bourse and other continental markets for equity trading and between eurex and london international financial futures and options exchange liffe for futures volume while exchanges compete along many dimensions e g payment for order flow transparency execution speed liquidity and price improvement will in our view be the key variables driving competition in the future over time high cost markets should be driven out of business as investors switch to cheaper trading venues moreover market structure is increasingly singled out by regulators exchanges and other market participants as a major determinant of liquidity 1

feedstock diversification for biodiesel production in brazil using the policy analysis matrix pam to evaluate the impact of the pnpb and the economic competitiveness of alternative oilseeds abstract while biodiesel feedstock diversification is a main objective of the brazilian national program for the production and use of biodiesel pnpb in portuguese its achievement has remained elusive and biodiesel is predominantly produced from soybean 75 this research uses the policy analysis matrix pam approach to evaluate the pnpb effects and compare the economic efficiency and the competitiveness of biodiesel from three oilseeds soybean rapeseed and sunflower in contrast to papers that present results of experimental biodiesel production initiatives this paper explores the case of representative production chains best available technology and management practices the findings indicate that biodiesel production is competitive from the three oilseeds but the profitability of biodiesel from the soybean is notably higher the tax breaks and subsidies provided by the pnpb have a positive impact on the profitability of biodiesel production chains 7 43 for soybean 3 88 for rapeseed 5 53 for sunflower these results are encouraging and suggest two actions i to review the incentive policies tax reduction and payments to farmers of the different crops pay for oil content instead of crop yield and ii to invest in organizational and managerial approaches in the alternative oilseed agricultural systems to improve their technical and economic efficiency

an empirical study of the effect of rule 19c 3 the extent to which all orders for common stocks should be consolidated that is sent to a single marketplace and the effect of consolidation on competition in the securities markets have been the subject of much debate in the past quarter century this debate has focused on offboard trading restrictions for member firms for example new york stock exchange nyse rule 390 and american stock exchange amex rule 5 and on the institution of appropriate intermarket linkages for example the consolidated transactions tape the consolidated quotations system and the intermarket trading system while the securities and exchange commission sec has attempted to promote competition in the securities markets the results of its efforts are uncertain consequently the consolidation fragmentation debate continues in this article we examine a very specific case in which the sec tried to increase the degree of competition in market making rule 19c 3 allowed off board trading of nyse listed stocks by exchange members as we will show this rule had both beneficial and adverse effects section i describes rule 19c 3 the environment which led to its introduction and the controversy surrounding it in section ii we examine the effect of rule 19c 3 on over the counter otc market making activity we find that for about 34 percent of the eligible stocks the introduction of exchange member market makers increased the total level and also the continuity of otc market making activity in section iii we find that rule 19c 3 has had a statistically significant effect in reducing percentage bidask spreads which ceteris paribus is desirable in section iv our analysis shows that rule 19c 3 has led to an increase in returns variance which ceteris paribus is undesirable finally our summary and conclusion are presented in section v

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

food self sufficiency comparative advantage and agricultural trade a policy analysis matrix for chinese agriculture revised china s rapid economic growth and gradual transition toward a market economy have brought about significant changes in production and consumption patterns and trade behavior in agriculture in this study the authors assess the comparative advantage and protection of china s major agricultural crops using a modified policy analysis matrix ipami and data from 1996 to 1998 results strongly suggest that china has a comparative advantage in labor intensive crops and a disadvantage in land intensive crops

the costs of indonesian sugar policy a policy analysis matrix approach indonesian sugar policy is a complex web of contradictory policies including mandatory production price supports and fertilizer and credit subsidies the policy analysis matrix pam was developed by monke and pearson to provide a more complete perspective on social profitability and the divergence between private and social costs than other commonly used social cost benefit measures the pam is used to analyze the effects of indonesian sugar policy on sugar production in irrigated and dryland areas on java the main sugar producing region in indonesia and to identify the distribution of resource transfers

the relation between price changes and trading volume a survey this paper reviews previous and current research on the relation between price changes and trading volume in financial markets and makes four contributions first two empiri cal relations are established volume is positively related to the magnitude of the price change and in equity markets to the price change per se second previous theoretical research on the price volume relation is summarized and critiqued and major insights are emphasized third a simple model ofthe price volume relation is proposed that is consis tent with several seemingly unrelated or contradictory observations and fourth several directions for future research are identified

short term pain for long term gain market deregulation and monetary policy in small open economies abstract this paper explores the effects of labor and product market reforms in a new keynesian small open economy model with labor market frictions and endogenous producer entry we show that it takes time for reforms to pay off typically at least a couple of years this is partly because the benefits materialize through firm entry and increased hiring both of which are gradual processes while any reform driven layoffs are immediate some reforms such as reductions in employment protection increase unemployment temporarily implementing a broad package of labor and product market reforms minimizes transition costs importantly reforms do not have noticeable deflationary effects suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath either because of the zero bound on policy rates or because of the membership in a monetary union may not be a relevant obstacle to reform alternative simple monetary policy rules do not have a large effect on transition costs

rural taxation in ethiopia 1981 1989 a policy analysis matrix assessment for net producers and net consumers abstract during the period of socialist rule 1974 1991 ethiopian agriculture was subject to an array of policy interventions this paper uses a policy analysis matrix pam approach to determine the effects of various policies on different types of households and in aggregate the analysis extends the usual use of pams by including consumption requirements and by addressing the variation in the impact of specific policies through time household models are used to quantify the effects of government intervention on both net consumers and net producers of cereals the analysis reveals that although cereal purchases were sometimes subsidized through overvaluation cereal deficit households paid high prices because of market segmentation and experienced reduced incomes due to exchange rate distortions households that tended to be surplus faced substantial indirect taxes through low producer prices results suggest that undistorted markets could enable many farms to accumulate sufficient reserves to cope with production variations but farms with average land availabilities are not sustainable given current technologies even with efficient commodity markets

trade size order imbalance and the volatility volume relation abstract this paper examines the roles of the number of trades size of trades and order imbalance buyer versus seller initiated trades in explaining the volatility volume relation for a sample of nyse and nasdaq stocks our results reconfirm the significance of the size of trades beyond that of the number of trades in the volatility volume relation on both markets after controlling for the return impact of order imbalance the volatility volume relation becomes much weaker for nyse stocks the order imbalance in large trade size categories affects the return more than in smaller size categories for nasdaq stocks the largest return impact comes from the order imbalance in maximum sized small order execution system soes trades

the trading profits of soes bandits1 abstract soes bandits are individual investors who use nasdaq s small order execution system soes for day trading their average profit per trade is small but they trade dozens or hundreds of times per week bandits usually establish a position before most market makers have updated their quotes and lay off the position at favorable prices through instinet or selectnet it is noteworthy that they trade profitably with market makers despite having less information bandits keep the profits and bear the losses from their trades thus they have greater incentives to trade well than the employees of market making firms