one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

does the bund dominate price discovery in euro bond futures examining information shares abstract this paper examines the relative information shares of the bund i e the 10 year euro bond future contract on german sovereign debt versus two futures with shorter maturity we find that the bund is most important but does not dominate price discovery the other contracts also have relevant and at many days even higher information shares in examining determinants of information shares we add order flow measures to market state variables and macroeconomic news more order flow in a contract consistently increases this contract s information share

informativeness of trade size in foreign exchange markets this article investigates a trading strategy that relies on private information in an electronic spot foreign exchange market in a structural microstructure model extended for high frequency data our analysis links the informational content of trading activity to order size we find that large currency orders are likely to be placed by informed traders during increased price volatility episodes in addition the data suggest that excess kurtosis in exchange rate returns corresponding to large price contingent trades is significantly lower than that in small trades

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

price volatility trading volume and market depth evidence from futures markets the relations between volume volatility and market depth in eight physical and financial futures markets are examined evidence suggests that linking volatility to total volume does not extract all information when volume is partitioned into expected and unexpected components the paper finds that unexpected volume shocks have a larger effect on volatility further the relation is asymmetric the impact of positive unexpected volume shocks on volatility is larger than the impact of negative shocks finally consistent with theories of market depth the study shows large open interest mitigates volatility

intradaily price volume adjustments of nyse stocks to unexpected earnings the speed and path of adjustment in stocks to the degree of earnings surprise in their quarterly announcements are studied using price volume transactions data a differential price adjustment process was observed with stocks having large positive earnings surprises experiencing a faster adjustment compared with those stocks with negative earnings surprises volume transaction frequency and size were found to be directly related to the absolute degree of surprise but very favorable earnings surprise stocks experienced initially a large number of smaller trades while stocks with large unfavorable earnings surprises had relatively fewer transactions but higher volume per trade the stock market s microstructure has received increasing attention from researchers especially from an empirical perspective as transaction data on prices and volume have become more readily available 1 an important subset of this research has been the study of stock price adjustments to significant news events specifically publicly announced information with economic content should be quickly reflected in prices in an unbiased manner this paper contains a study of the intradaily adjustment in stocks to the informational content of earnings reports using price changes trading volume and transaction frequency and size we examine the transaction to transaction and time series stock behavior associated with different degrees of earnings surprise embedded in earnings announcements the degree of surprise is measured by a comparison of actual with forecasted earnings for 325 new york stock exchange nyse firms these firms are subdivided into five earnings surprise categories in order to determine whether the speed and path of their price volume adjustment processes are different one question of interest is whether the adjustment process for favorable versus unfavorable earnings surprises is similar or different another is whether any adjustment is distinguished by a few large trades or a large number of smaller

deutsche mark dollar volatility intraday activity patterns macroeconomic announcements and longer run dependencies this paper provides a detailed characterization of the volatility in the deutsche mark dollar foreign exchange market using an annual sample of five minute returns the approach captures the intraday activity patterns the macroeconomic announcements and the volatility persistence arch known from daily returns the different features are separately quantified and shown to account for a substantial fraction of return variability both at the intraday and daily level the implications of the results for the interpretation of the fundamental driving forces behind the volatility process is also discussed the efficient market hypothesis contends that financial asset prices provide rational assessments of fundamental values and future payoffs by implication price changes should reflect the arrival and processing of all relevant new information however the proportion of return variability that can be ascribed to public news announcements is low for example cutler poterba and summers 1989 find that even the largest daily price changes in the stock market generally cannot be associated with any significant economic news 1 moreover proxies for the flow of public information e g the number of news items released by reuter s news service berry and hiowe 1994 or dow jones company mitchell and mulherin 1994 explain little of the overall variation thus if private information is ruled out proponents of rational price formation have to assert the existence of important news items

volatility and trading activity in short sterling futures the objective of the present study is to examine the interplay between information trading volume and volatility in short sterling futures more specifically the paper concentrates on the role of liquidity variables as conduits of information arrival and whether such variables could be an exclusive platform of the market s information set the analytical framework employed to examine the interaction among those factors is based on the conditional volatility family of techniques the approach is well suited as it naturally leads to examine the interaction among volatility and sources of information in an attempt to identify proxies of information and their role in determining volatility four main conclusions have emerged first the empirical findings suggest that both volume and open interest exhibit a positive correlation with volatility second based on the current methodology one can observe the persistence and importance of garch effects after accounting for liquidity third the liquidity varia

why option prices lag stock prices a trading based explanation while many studies find that option prices lead stock prices stephan and wvhaley 1990 find that stocks lead options we find no evidence that options even deep out of the money options lead stocks after confirming stephan and whaley s results we show their results can be explained as spurious leads induced by infrequent trading of options we show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices hence we find no evidence of arbitrage opportunities associated with the stock lead in a perfect market price discrepancies should be instantly arbitraged away in particular option prices should neither lead nor lag stock prices in real markets only very short leads should occur traders with private information who are confident that their information is valid and that they will not be detected generally want highly leveraged positions to exploit their advantage thus we might expect options with their greater leverage to lead stocks if information trading is important manaster and rendleman 1982 bhattacharya 1987 and anthony 1988 find evidence that options

the informational role of stock and option volume this article analyzes the intraday interdependence of order flows and price movements for actively traded nyse stocks and their chicago board options exchange cboe traded options stock net trade volume buyer initiated volume minus seller initiated volume has strong predictive ability for stock and option quote revisions but option net trade volume has no incremental predictive ability this suggests that informed investors initiate trades in the stock market but not in the option market on the other hand both stock and option quote revisions have predictive ability for each other thus while information in the stock market is contained in both quote revisions and trades information in the option market is contained only in quote revisions copyright 2002 oxford university press

an analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies the notion that a real security is redundant when it can be synthesized by a dynamic trading strategy ignores the informati onal role of real securities markets portfolio insurance uses a dyna mic strategy to synthesize a european put the absence of trading in an appropriate real put option prevents the transmittal of informatio n to market participants about the future price volatility associated with current dynamic hedging strategies less information is transmi tted to potential liquidity providers it will therefore be more di fficult for the market to absorb the trades implied by the dynamic he dging strategies and the stocks future price volatility will rise copyright 1988 by the university of chicago

stock prices and volume the authors undertake a comprehensive investigation of price and volume co movement using daily new york stock exchange data from 1928 to 1987 they adjust the data to take into account well known calendar effects and long run trends to describe the process they use a seminonparametric estimate of the joint density of current price change and volume conditional on past price changes and volume four empirical regularities are found 1 positive correlation between conditional volatility and volume 2 large price movements are followed by high volume 3 conditioning on lagged volume substantially attenuates the leverage effect and 4 after conditioning on lagged volume there is a positive risk return relation article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

common trends in global volatility abstract this paper investigates the long term patterns in global foreign exchange equity and bond markets in three different trading zones namely japan europe and the united states recent advances in the measurement of volatility from high frequency data are used together with the concepts of fractional integration and cointegration the specific objective is to consider whether there are common trends that drive volatility in the global marketplace this so called commonality in volatility hypothesis is formulated using a cofractional model the results confirm that volatility in all three financial asset markets across all three trading zones share a single common trend which lends itself to interpretation as a global news stream

a note on intraday foreign exchange volatility and the informational role of quote arrivals abstract the conditional variance for five different hourly foreign exchange rates is modeled using a garch model with the number of incoming quotes as a regressor in the conditional variance equation we find that the number of quotes is positively and significantly related to the volatility of all rates examined the empirical findings support the conjecture of a time consuming information process

long memory in volatility and trading volume abstract we use fractionally integrated time series models to investigate the joint dynamics of equity trading volume and volatility bollerslev and jubinski 1999 show that volume and volatility have a similar degree of fractional integration and they argue that this evidence supports a long run view of the mixture of distributions hypothesis we examine this issue using more precise volatility estimates obtained using high frequency returns i e realized volatilities our results indicate that volume and volatility both display long memory but we can reject the hypothesis that the two series share a common order of fractional integration for a fifth of the firms in our sample moreover we find a strong correlation between the innovations to volume and volatility which suggests that trading volume can be used to obtain more precise estimates of daily volatility for cases in which high frequency returns are unavailable

trading patterns and prices in the interbank foreign exchange market the behavior of quote arrivals and bid ask spreads is examined for continuously recorded deutsche mark dollar exchange rate data over time across locations and by market participants a pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns models for the conditional mean and variance of returns and bid ask spreads indicate volatility clustering at high frequencies the proposition that trading intensity has an independent effect on returns volatility is rejected but holds for spread volatility conditional returns volatility is increasing in the size of the spread there is a growing body of theoretical studies on the pattern of trading activity in financial markets with implications for the time series behavior of transactions prices and intensity of trading the empirical literature addressing similar concerns using intraday market data appropriate for such tasks is sparse particularly in the area of the trading of currencies the purpose of this paper is to examine both international patterns of intraday trading activity and the time series properties of returns and bid ask spreads for the deutsche mark dollar exchange rate in the interbank foreign exchange market the goal is to provide information useful in the further development of market microstructure models of trading and to compare empirical findings against theoretical results already in existence the foreign exchange market is in operation twenty four hours a day seven

heterogeneous information arrivals and return volatility dynamics uncovering the long run in high frequency returns recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean reverting fractionally integrated process meanwhile much shorter lived volatility dynamics are typically observed with high frequency intradaily returns the present article demonstrates that by interpreting the volatility as a mixture of numerous heterogeneous short run information arrivals the observed volatility process may exhibit long run dependence as such the long memory characteristics constitute an intrinsic feature of the return generating process rather than the manifestation of occasional structural shifts these ideas are confirmed by our analysis of a one year time series of fiveminute deutschemark u s dollar exchange rates among the most puzzling issues is the behavior of volatility while the general properties of volatility remain elusive perhaps the most intriguing feature revealed by empirical work on volatility is its long persistence such behavior has sparked a search almost akin to that for the holy grail for the perfect garch model but the underlying question of why such volatility persistence endures remains unanswered we conjecture that the ability to analyze higher frequency data may be particularly useful in pursuing this issue goodhart and o hara 1997 the pronounced volatility clustering is arguably one of the most striking features of financial price series recorded at daily or weekly intervals and a large body of literature seeking to characterize this aspect of speculative returns has emerged over the past decade 1 at the same time convincing theoretical explanations for the underlying sources of long run persistence in volatility remain elusive the recent advent of comprehensive high frequency andersen is from the j l kellogg graduate school of management of northwestern university bollerslev is from the university of virginia and is a research associate at the national bureau of economic research we gratefully acknowledge the financial support provided by a research grant from the institute for quantitative research in finance the q group special thanks are due to olsen and associates for making the intradaily exchange rate quotes and reuter s news tape available we have received valuable comments from wake epps clive w j granger stephen f gray j huston mcculloch as well as seminar participants at the december 1996 triangle econometrics workshop the 1997 afa meetings in new orleans academia sinica the wharton school usc and georgetown and york universities we remain fully responsible for the content 1 see bollerslev chou and kroner 1992 for a survey of this literature using arch type

toward a national market system for u s exchange listed equity options in its response to the 1975 congressional mandate to implement a national market system for financial securities the securities and exchange commission sec initially exempted the option market recent dramatic changes in the structure of the option market prompted the sec to revisit this issue we examine a sample of actively traded multiply listed equity options to ask whether this market s characteristics appear consistent with the goals of producing economically efficient transactions and facilitating best execution we find marked changes between june 2000 when quotes are often ignored and january 2002 when the market more closely resembles a national market equity option trading changed dramatically with the beginning of vigorous competition for order flow in many actively traded options during august 1999 the

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

causality in quantiles and dynamic stock return volume relations abstract this paper investigates the causal relations between stock return and volume based on quantile regressions we first define granger non causality in all quantiles and propose testing non causality by a sup wald test such a test is consistent against any deviation from non causality in distribution as opposed to the existing tests that check only non causality in certain moment this test is readily extended to test non causality in different quantile ranges in the empirical studies of three major stock market indices we find that the causal effects of volume on return are usually heterogeneous across quantiles and those of return on volume are more stable in particular the quantile causal effects of volume on return exhibit a spectrum of symmetric v shape relations so that the dispersion of return distribution increases with lagged volume this is an alternative evidence that volume has a positive effect on return volatility moreover the inclusion of the squares of lagged returns in the model may weaken the quantile causal effects of volume on return but does not affect the causality per se

an empirical application of stochastic volatility models textabstractthis paper studies the empirical performance of stochastic volatility models for twenty years of weekly exchange rate data for four major currencies we concentrate on the effects of the distribution of the exchange rate innovations for both parameter estimates and for estimates of the latent volatility series the density of the log of squared exchange rate innovations is modelled as a flexible mixture of normals we use three different estimation techniques quasi maximum likelihood simulated em and a bayesian procedure the estimated models are applied for pricing currency options the major findings of the paper are that 1 explicitly incorporating fat tailed innovations increases the estimates of the persistence of volatility dynamics 2 the estimation error of the volatility time series is very large 3 this in turn causes standard errors on calculated option prices to be so large that these prices are rarely significantly different from a model with constant volatility

short term interest rates as subordinated diffusions in this article we cbaracterize and estimate the process for short term interest rates using federal funds interest rate data we presume that we are observing a discrete time sample of a stationary scalar diffusion we concentrate on a class of models in whicb the local volatility elasticity is constant and the drift has aflexible specufication to accommodate missing observations and to break the link between economic time and calendar time we model the sampling scheme as an increasing process that is not directly observed we propose and implement two new methods for estimation we find evidence for a volatility elasticity between one and onehalf and two when interest rates are high local mean reversion is smaul and the mechanism for inducing stationarity is the increased volatility of the diffusion process

estimating the effects of information surprises and trading on stock returns using a mixed jump diffusion model i present a methodology that uses the mixed jump diffusion model for stock returns to estimate the separate effects of information surprises and strategic trading around corporate events using simulation techniques i show that for events with multiple announcements spread over a long time the estimators derived from the mixed jump diffusion model are more powerful compared to the traditional cumulative abnormal return estimators the new methodology is used to study the separate effects of information surprises and strategic trading associated with blockholdings and subsequent targeted repurchases i find that for more than 93 percent of the firms in our sample the mixed jump diffusion model is statistically superior to the pure diffusion model in describing stock returns more important i find a statistically significant negative effect due to trading while the average effect around announcements is statistically insignificant in contrast the standard cumulative abnormal return is not statistically different from zero article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

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

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

stock market quality in the presence of a traded option we use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option we find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated the time series properties of the stock price depend directly on the intrinsic value of the option when the intrinsic value of the option is positive informational efficiency is higher in the market for the stock and volatility is lower we provide evidence that the introduction of an option improves market quality in the underlying asset

time varying international stock market interaction and the identification of volatility signals abstract this paper investigates the dependency of international stock market interaction on financial volatility we show in a stylized economic model that volatility dependent cross market spillovers can be interpreted in two different ways as indicating information flow or uncertainty if higher volatility in one market leads to higher lower reactions in another market volatility reflects information uncertainty we apply a simultaneous time varying coefficient model where structural arch type variances serve two purposes governing the time variation of spillovers and ensuring statistical identification we analyze data of us and further stock markets indeed we find strong nonlinear volatility dependent spillovers

stealth trading which traders trades move stock prices usingaudit trail data for a sample of nyse firms we show that medium size trades are associated with a disproportionately large cumulative stock price change relative to their proportion of all trades and volume this result is consistent with the predictions of barclay and warner s 1993 stealth tradinghypothesis we find that the source of this disproportionately large cumulative price impact of medium size trades is trades initiated by institutions this result is robust to various sensitivity checks our findings appear to confirm street lore that institutions are informed traders 2001 elsevier science s a all rights reserved

correlated arch corrarch modelling the time varying conditional correlation between financial asset returns abstract although the time variation of the conditional correlations of asset returns is a well established stylized fact and of crucial importance for efficient financial decisions there is no explicit general model available for its estimation and forecasting in this paper we propose a bivariate garch covariance structure in which conditional variances can follow any garch type process while conditional correlation is generated by an explicit discrete time stochastic process the corrarch process a high order corrarch can parsimoniously be represented by a corgarch process the model successfully generates the reported stylized facts establishes an autocorrelation structure for correlations and thus provides an explicit framework for out of sample forecasting we provide empirical evidence from the g7 stock market indexes

volatility volume causality across single stock spot futures markets in india abstractthis study examines the causal relationships between volatility and volume across spot and futures market for the 50 constituent stocks of the cnx nifty index granger non causality tests implemented using vector autoregression var and asymmetric var models indicate the presence of significant causal relations from both the spot and futures volume to both the spot and futures volatility bidirectional causal relationships between spot and futures volume were observed for almost all stocks but few stocks displayed a similar relationship between volatilities the results highlight the importance of volume in absorbing information and its behaviour as the conduit of information

volume volatility and public news announcements we provide new empirical evidence for the way in which financial markets process information our results rely critically on high frequency intraday price and volume data for the s p 500 equity portfolio and u s treasury bonds along with new econometric techniques for making inference on the relationship between trading intensity and spot volatility around public news announcements consistent with the predictions derived from a theoretical model in which investors agree to disagree our estimates for the intraday volume volatility elasticity around important news announcements are systematically below unity our elasticity estimates also decrease significantly with measures of disagreements in beliefs economic uncertainty and textual based sentiment further highlighting the key role played by differences of opinion

intraday price change and trading volume relations in the stock and stock option markets this study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the cboe during the first quarter of 1986 after purging the price change series of the effects of bid ask spreads multivariate time series analysis is used to estimate the lead lag relation between the price changes in the option and stock markets the results indicate that price changes in the stock market lead the option market by as much as fifteen minutes the analysis of trading volume indicates that the stock market lead may be even longer the intense trading activity in and in fact the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock in addition these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace the resulting increase in trading activity together with the inextricable arbitrage linkage between stock and option prices imply an increase in market efficiency this study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the chicago board options exchange during the first quarter of 1986 in particular intraday call option price changes are translated into implied stock price changes using the american call option pricing model these intraday implied stock price changes are then compared with the actual stock price changes to identify which if either market leads the other in perfectly functioning capital markets there should be complete simultaneity between the series that is new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously institutional factors however may make the stock option market more attractive to information traders this may cause price changes and trading activity due to new information to be observed in the option market first followed by price

explaining bond returns in heterogeneous agent models the importance of higher order moments abstract this paper examines the higher order moments and nonlinear dynamic properties of discount bond returns in an equilibrium heterogeneous agent economy with incomplete markets and borrowing constraints we find that while it is possible for the economic model to match the mean and variance of the observed bond returns by choosing the parameters such that the borrowing constraint is binding sufficiently often the implied higher order moments are at odds with the data to match the higher order moments one needs a model in which the borrowing constraint is binding at times but not too often in this case one does not match the first two moments using the seminonparametric density estimation and the nonlinear impulse response analysis we find that our economic model can mimic the asymmetric effect of return shocks on conditional volatility as documented for the real bond returns however the economic model has difficulty replicating the dynamic properties observed in the data when the parameter values are chosen to match the first two moments of the observed bond returns

volatility volume co movements evidence from china metal markets abstractthis article investigates the interactional relationship between price volatility and futures trading activity for three heavily traded metal products on the shanghai metal exchange and the shanghai futures exchange using models based on vector autoregression and generalized method of moments we show in particular that futures trading activity has a strong impact on both spot and futures price volatility in copper and aluminium markets futures trading activity leads spot market volatility in copper and aluminium markets which suggests that futures markets have a destabilizing effect in order to disentangle the effect of different traders types on asset price movements we decompose futures trading into speculators and hedgers trading and investigate their contributions to volatility as a robustness check we investigate the impact of endogenous structural breaks on the interactional relationship between price volatility and futures trading

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

market overreaction and investment strategies we investigated the overreaction of the korean market in response to shocks in the us stock market and analysed the dynamic relationship between these two markets since 1996 we found that the kospi 200 index futures overreacted to the s p 500 index returns during the period from 2000 to 2009 when the korean market was in its growth stage as the korean market matured and the kospi 200 overnight futures were introduced in 2009 the overreaction disappeared when investors employed the kelly model or value at risk to exploit the overreaction their trading strategies produced significant profits during the growth stage even after considering transaction costs and risk but the profits attenuated once the overnight futures market was launched in 2009

dynamic discrete mixtures for high frequency prices the tick structure of the financial markets entails discreteness of stock price changes based on this empirical evidence we develop a multivariate model for discrete price changes featuring a mec

money and market incompleteness in overlapping generations models abstract this paper investigates the extent to which the character of equilibria in stochastic overlapping generations models stems from the model s generic market incompleteness in addition it addreses the question of whether money serves to complete markets in these models we show that money does not complete markets in the sense of expanding the set of state contingent commodities that an individual may trade the introduction of money effects state contingent transfers of wealth between individuals this is a generalization of a result obtained by marshall sonstelie and gilles 1987 numerical simulation of the model suggests that the risk sharing induced in the monetary economy leads to substantial increases in welfare levels relative to the nonmonetary economy

informational linkages across trading regions evidence from foreign exchange markets abstract using a new high frequency data set from electronic broking services ebs this paper examines informational linkages in the euro dollar and dollar yen exchange rates across five trading regions asia pacific the asia europe overlap europe the europe america overlap and america information is proxied by exchange rate return direction of return volatility trading activity and order flow we find that informational linkages are statistically significant at both own region and inter region levels but own region spillovers dominate in economic significance especially for volatility and trading activity in addition order flow spillovers from the europe america overlap trading region are the most important source of spillovers to other trading regions for both currency pairs

information time option pricing theory and empirical evidence abstract with a stochastic time change from calendar time to information time we derive a parsimonious option pricing formula with stochastic volatility as a risk neutral poisson sum of merton s 1973 prices over the option s information time maturity domain the formula contains two unobservable parameters information arrival intensity and information time asset volatility with stochastic volatility induced by random information arrival when the information arrival rate intensifies the option price increases and vice versa we test the formula in pricing hedging and excess profits capture empirically using currency and the s p 500 futures options transaction data

does vix or volume improve garch volatility forecasts abstractthis article considers whether the inclusion of two additional variables can improve volatility forecasts over a standard garch based model we consider three alternative ways of incorporating the volatility index vix and trading volume as exogenous variables within a selection of garch models we are particularly interested in whether these variables have additional incremental forecast power over and above the baseline garch specification our results suggest that both the vix and volume do provide some additional forecast power and this is generally improved when considering both of these series jointly in the model however while the results may be statistically significant the gain is marginal and the coefficient values small moreover in a horse race exercise vix does not outperform the garch approach in answering the question of whether vix produces better forecasts than the garch model then the answer is no but the informational content of vix cannot be ignored and should be incorp

financial innovation and asset price volatility we compare asset prices in an overlapping generations model for incomplete and complete markets individuals within a generational cohort have heterogeneous beliefs about future states of the economy and thus would like to make bets against each other in the incomplete markets economy agents cannot make such bets asset price volatility is very small the situation changes dramatically when markets are completed through financial innovations as the set of available securities now allows agents with different beliefs to place bets against each other wealth shifts across agents and generations such changes in the wealth distribution lead to substantial asset price volatility

a maximum likelihood approach for non gaussian stochastic volatility models a maximum likelihood approach for the analysis of stochastic volatility models is developed the method uses a recursive numerical integration procedure that directly calculates the marginal likelihood only conventional integration techniques are used making this approach both flexible and simple experimentation shows that the method matches the performance of the best estimation tools currently in use new stochastic volatility models are introduced and estimated the model that best fits recent stock index data is characterized by a highly non gaussian stochastic volatility innovation distribution this model dominates a model that includes an autoregressive conditional heteroscedastic effect in the stochastic volatility process and a model that includes a stochastic volatility effect in the conditional mean

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

information trade and derivative securities hellwig s 1980 model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset or by trading in a derivative asset with multiple trading sessions uninformed investors behave as rational trend followers while more informed investors follow a contrarian strategy as trading becomes continuous pareto efficiency is achieved with trading in an appropriate derivative security pareto efficiency may be achieved in only a single round of trading all derivative claims are then priced on black and scholes 1973 principles and in the absence of further supply shocks no trading will take place in subsequent trading rounds article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

are harvest forecasts news usda announcements and futures market reactions futures market price data for maize and soyabeans are used to examine reactions to us department of agriculture harvest forecasts these forecasts are widely known and reasonably accurate so failure to find significant reaction would indicate that the usda did not contribute additional news relative to information already possessed by traders various t tests f tests and nonparametric chi square tests indicate rejection of the null hypothesis of no significant difference between means of absolute values or variances of changes in closing prices on days following a usda announcement and other days thus the data indicate that significant information is contained in the forecasts

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

the impact of energy derivatives on the crude oil market we examine the effects of energy derivatives trading on the crude oil market there is a common public and regulatory perception that derivative securities increase volatility and can have a destabilizing effect on the underlying market consistent with this view we find an abnormal increase in volatility for three consecutive weeks following the introduction of nymex crude oil futures while there is also evidence of a longer term volatility increase this is likely due to exogenous factors such as the continuing deregulation of the energy markets subsequent introductions of crude oil options and derivatives on other energy commodities have no effect on crude oil volatility we also examine the effects of derivatives trading on the depth and liquidity of the crude oil market this analysis reveals a strong inverse relation between the open interest in crude oil futures and spot market volatility specifically when open interest is greater the volatility shock associated with a given unexpected increase in volume is much smaller

asset markets and equilibrium processes the failure of the asset market to be complete causes serial dependence in output and prices which is suboptimal we consider an economy with white noise shocks when the asset market is complete an optimal competitive allocation inherits this strong stationarity when the asset market is only sequentially complete prices and output necessarily display serial dependence at equilibrium the further incompleteness of a monetary economy explains co movements in real and nominal variables

the dynamic relationship between stock returns and trading volume domestic and cross country evidence abstract this paper examines the dynamic relations causal relations and the sign and magnitude of dynamic effects between stock market trading volume and returns and volatility for both domestic and cross country markets by using the daily data of the three largest stock markets new york tokyo and london major findings are as follows first trading volume does not granger cause stock market returns on each of three stock markets second there exists a positive feedback relationship between trading volume and return volatility in all three markets third regarding the cross country relationships us financial market variables in particular us trading volume contains an extensive predictive power for uk and japanese financial market variables fourth sub sample analyses show evidence of stronger spillover effects after the 1987 market crash and an increased importance of trading volume as an information variable after the introduction of options in the us and japan

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

intergenerational redistribution in the great recession in this paper we construct a stochastic overlapping generations general equilibrium model in which households are subject to aggregate shocks that aect both wages and asset prices we use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across dierent household age groups the model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages asset price declines hurt the old who rely on asset sales to nance consumption but benet the young who purchase assets at depressed prices in our preferred calibration asset prices decline more than twice as much as wages consistent with the experience of the us economy in the great recession a model recession is approximately welfare neutral for households in the 20 29 age group but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over

a dynamic equilibrium model of asset prices and transaction volume a dynamic general equilibrium model of capital asset pricing is constructed in which the volume of capital traded is determined endogenously the model also gives rise to a novel asset pricing formula it is shown that temporary shocks can give rise to serially correlated changes in the price of capital and transaction volume that persist long after the initial disturbance the frequency and amplitude of the resulting cycles are related to the length of the agent s planning horizon and the discount factor the model s implications for explaining asset price volatility are also explored

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options

rolling sampled parameters of arch and levy stable models in this paper an asymmetric autoregressive conditional heteroskedasticity arch model and a levy stable distribution are applied to some well known financial indices dax30 ftse20 ftse100 and sp500 using a rolling sample of constant size in order to investigate whether the values of the estimated parameters of the models change over time although there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time the arch model adequately forecasts the one day ahead volatility a simulation study is run to investigate whether the time variant attitude holds in the case of a generated arch data process revealing that even in that case the rolling sampled parameters are time varying

economic determinants of trading volume in futures markets abstract in this paper we test first the hypothesis that the volume of trade in futures markets follows a random walk process next we examine the role of several monthly macroeconomic variables and find that these variables have a statistically significant impact on the trading volume the economic consequences of our findings indicate that futures traders futures exchanges regulatory agencies and others associated with futures markets activities act rationally in watching closely these macroeconomic variables

are trade size based inferences about traders reliable evidence from institutional earnings related trading the use of observed transaction sizes to differentiate between small and large investor trading patterns is widespread a significant concern in such studies is spurious effects attributable to misclassification of transactions particularly those originating from large investors such effects can arise unintentionally strategically or endogenously we examine comprehensive records of a sample of institutional investors i e large traders including their order sizes and overall position changes to assess the degree to which such misclassifications give rise to spurious inferences about small and large investor trading activities our analysis shows that these institutions are heavily involved in small transaction activity it also shows that they increase their order sizes substantially in announcement periods relative to nonannouncement periods presumably as an endogenous response to earnings news in the immediate earnings announcement period transaction size based inferences about directional trading are quite misleading producing spurious small trader effects and more surprisingly erroneous inferences about large trader activity

endogenous trading volume and momentum in stock return volatility this article examines the ability of volume data to shed light on the source of persistence in stock return volatility a mixture model in which a latent common factor restricts the joint density of volume and returns is used to relax the assumption of exogenous volume used in previous studies we use a point in time signal extraction procedure to identify this latent process and a calibrated simulation to conduct analysis of the viability of the model to explain important properties of the data using daily returns and volume on individual stocks our procedure cannot accommodate serial dependence in squared returns

oil and stock market volatility a multivariate stochastic volatility perspective abstract this paper models the volatility of stock and oil futures markets using the multivariate stochastic volatility structure in an attempt to extract information intertwined in both markets for risk prediction it offers four major findings first the stock and oil futures prices are inter related their correlation follows a time varying dynamic process and tends to increase when the markets are more volatile second conditioned on the past information the volatility in each market is very persistent i e it varies in a predictable manner third there is inter market dependence in volatility innovations that hit either market can affect the volatility in the other market in other words conditioned on the persistence and the past volatility in their respective markets the past volatility of the stock oil futures market also has predictive power over the future volatility of the oil futures stock market finally the model produces more accurate value at risk estimates than other benchmarks commonly used in the financial industry

stealth trading in options markets we investigate how price discovery occurs in the options markets through traders trade size choice by employing transactions data on all options traded on a sample of 100 firms we show that informed traders fragment their orders into small medium trades for low high volume contracts we also find that almost 60 of the price discovery occurs in the exchange with the largest market share for a given option where informed traders favor medium size trades upon examining distinct option series for a given stock we find that at the money calls display the highest information share

liquidity credit quality and the relation between volatility and trading activity evidence from the corporate bond market this paper investigates the roles of illiquidity and credit risk in determining the relations between price volatility of a bond and its trading frequency and trade size based on a large transaction dataset from october 2004 to june 2012 we find a positive relation between volatility and trading frequency and a negative relation between volatility and trade size consistent with the prediction of the search based theory the relations are much stronger for illiquid and risky bonds furthermore both liquidity and credit risk become more important in times of stress and their effects are reinforcing results strongly suggest that search frictions and credit risk are important factors driving the relation between volatility and trading activity in the corporate bond market

modelling s p 100 volatility the information content of stock returns abstract theoretical models that relate volatility to the quantity of information are extended to a multi asset setting and it is deduced that stock returns may or may not have incremental information when modelling index volatility depending on the sources of information that move stock prices the first empirical study that can help resolve this theoretical uncertainty is presented a detailed analysis of the daily volatility of the s p 100 index from 1984 to 1998 shows there is some incremental volatility information in the returns from the 100 shares that define the index this evidence is obtained from arch models that incorporate leverage effects dummy variables for the 1987 crash and aggregate measures of stock return volatility significant differences between estimated volatilities are found for various stock measures and sub periods

endogenous market thinness and stock price volatility thin equity markets cannot accommodate temporary bulges of buy or sell orders without large price movements the resulting volatility can induce risk averse transactors who face transaction costs to desert these markets thus thinness and the related price volatility may become joint self perpetuating features of an equity market irrespective of the volatility of asset fundamentals if however appropriate incentive schemes are adopted to encourage entry by additional investors this vicious circle can be broken eventually shifting the market to a selfsustaining superior equilibrium characterized by a higher number of transactors lower price volatility and larger supply of the asset a number of empirical studies cohen et al 1976 telser and higimbotham 1977 pagano 1986 tauchen and pitts 1983 have found that thin speculative markets are ceteris paribus more volatile than deep ones a plausible explanation for this finding is that thin markets are generally characterized by small numbers of transactors per unit time and thus their prices are more sensitive to the impact of individual traders demand shocks conversely in deep markets transactors are so many that the uncorrelated demand shocks experienced by individual traders tend to offset each other and leave market prices largely unaffected while this suggests a rationale for the observed relationship between market size and price volatility it does so by taking market size as the exogenous factor however the volatility of a speculative market may feed back on its size in the sense that the high liquidation risk implied by very volatile prices can induce potential entrants to keep out of the market this paper shows that in a stock market with transaction costs this interaction between thinness and volatility can produce multiple steady state equilibria some characterized by low trade and high volatility and others by high trade and low volatility whether the market will settle in one equilibrium or another depends entirely on the expectations held by economic agents sections 2 and 3 the existence of these multiple bootstrap equilibria can be explained heuristically as follows each additional trader generates a positive externality for other actual or potential traders by decreasing the riskiness of the stock lower risk in turn tends to attract more investors with the effect of raising stock prices and inducing corporations to issue additional equity we thus have a feedback loop between market size and price volatility where market size is measured both along the dimension of the number of traders and along that of the total stock of equities if however investors face transactions costs in the stock market this positive feedback may fail to be operative if the volume of trade is expected to be small investors with relatively high transaction costs will abstain from trading thus the market

estimation of dynamic bivariate mixture models this note compares a bayesian markov chain monte carlo approach implemented by watanabe with a maximum likelihood ml approach based on an efficient importance sampling procedure to estimate dynamic bivariate mixture models in these models stock price volatility and trading volume are jointly directed by the unobservable number of price relevant information arrivals which is specified as a serially correlated random variable it is shown that the efficient importance sampling technique is extremely accurate and that it produces results that differ significantly from those reported by watanabe

option pricing with stochastic volatility information time vs calendar time empirical evidence has shown that subordinated processes represent well the price changes of stocks and futures using either transaction counts or trading volume as a proxy for information arrival it supports the contention that volatility is stochastic in calendar time because of random information arrival and thus becomes stationary in information time this contention has also been supported later in theoretical models in this paper we investigate the implication of this contention to option pricing first we price the option in calendar time where the return of the underlying asset follows a jump subordinated process we extend rubinstein s rubinstein m 1976 the valuation of uncertain income streams and the valuation of options bell j econom management sci 7 407 425 and ross s ross s 1989a information and volatility the no arbitrage martingale approach to timing and resolution irrelevancy finance44 1 17 martingale valuation methodology to incorporate the pricing of volatility risk the resulting equilibrium formula requires estimating seven parameters upon implementation we then make a stochastic time change from calendar time to information time in order to obtain a stationary underlying asset return process to price the option we find that the isomorphic option has random maturity because the number of information arrivals prior to the option s calendar time expiration date is random we value the option using dynkin s dynkin e b 1965 markov processes vols i and ii springer verlag berlin and new york version of the feynman kac formula that allows for a random terminal date the resulting information time formula requires estimating only one additional parameter compared to the black scholes s in practical application in this regard the time change has reduced the computational complexity of the option pricing problem simulations show that the formula may outperform the black scholes black f m scholes 1973 the pricing of options and corporate liabilities political econom 81 637 659 and merton merton robert c 1976a option pricing when underlying stock returns are discontinuous financial econom 3 125 143 models in pricing currency options as a first attempt to derive valuation relationships in the information time economy this investigation may suggest that the information time approach is a functional alternative to the current calendar time norm it is especially suitable for deriving volatility free portfolio insurance strategies

the behaviour of futures prices over time 1985 the behaviour of futures prices over time applied economics vol 17 no 4 pp 713 734

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

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

intra day futures price volatility information effects and variance persistence this paper was prepared for presentation at the conference on nonlinear dynamics and econometrics ucla 5 6 april 1991 under the title information and chronological time effects in intra day futures price volatility the authors are grateful to participants of the nonlinear dynamics conference and to leigh riddick george wang and two anonymous referees for helpful comments the bds program was provided by w d dechert and the bispec program was provided by doug patterson the views stated within are those of the authors and do not necessarily reflect those of the commodity futures trading commission or its staff this paper examines the role of the rate of information arrival proxy variables as they relate to persistence in the variance structure of minute by minute s p 500 index futures returns series the role of contract volume floor transactions the number of price changes executed order imbalance and an information composite in reducing variance persistence is examined all proxy variables are found to explain a significant amount of returns variance while the characteristics of returns data vary daily some evidence of remaining variance persistence is found regardless of the definition of the rate of information arrival variable our results suggest that utilization of a pure arch type model for highfrequency returns data implies a mis specification

differential information and dynamic behavior of stock trading volume this article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock investors trade competitively in the stock market based on their private information and the information revealed by the market clearing prices as well as other public news we examine how trading volume is related to the information flow in the market and how investors trading reveals their private information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

using implied volatility on options to measure the relation between asset returns and variability abstract prior research has documented that volatility in financial asset markets is most directly related to trading rather than calendar days and that there is an inverse asymmetric relation between volatility and returns in both stocks and long term bonds we examine these relations in 37 futures options markets representing a wide variety of asset types using futures prices and implied volatilities from this extensive array of markets we confirm that in all of them save one market volatility is more directly related to trading days however the nature of the association between implied volatility and underlying asset returns varies greatly across asset categories and across exchanges thus we show that findings from equity markets apparently are not generalizable to other asset classes

efficient gradualism in intertemporal portfolios abstract this paper examines intertemporal portfolio plans under autocorrelation in asset returns and considers whether these plans conform to the common advice that risky assets be bought gradually and then held in decreasing amounts as the investment horizon approaches given elliptical returns optimal portfolio plans with precommitment must be mean variance efficient then for arma 1 1 parameterizations with negative autocorrelation the age effect gradual diminishing of risky holdings as the horizon approaches is confirmed as is dollar cost averaging gradual entry into the risky asset for sufficiently distant horizons for a numerically analyzed alternative bivariate returns process only the age effect is confirmed

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

a non linear filtering approach to stochastic volatility models with an application to daily stock returns this paper develops a new model for the analysis of stochastic volatility sv models since volatility is a latent variable in sv models it is difficult to evaluate the exact likelihood in this paper a non linear filter which yields the exact likelihood of sv models is employed solving a series of integrals in this filter by piecewise linear approximations with randomly chosen nodes produces the likelihood which is maximized to obtain estimates of the sv parameters a smoothing algorithm for volatility estimation is also constructed monte carlo experiments show that the method performs well with respect to both parameter estimates and volatility estimates we illustrate our model by analysing daily stock returns on the tokyo stock exchange since the method can be applied to more general models the sv model is extended so that several characteristics of daily stock returns are allowed and this more general model is also estimated copyright 1999 john wiley sons ltd

bridging the gap between the distribution of realized ecu volatility and arch modelling of the euro the garch nig model summary this paper bridges the gap between traditional arch modelling and recent advances on realized volatilities based on a ten year sample of five minute returns for the ecu basket currencies versus the us dollar we find that the realized volatilities constructed from the summation of the high frequency intraday squared returns conditional on the lagged squared daily returns are approximately inverse gaussian ig distributed while the distribution of the daily returns standardized by their realized volatilities is approximately normal moreover the implied daily garch model with normal inverse gaussian nig errors estimated for the ecu returns results in very accurate out of sample predictions for the three years of actual daily euro us dollar exchange rates copyright 2002 john wiley sons ltd

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed