when is external debt sustainable the article empirically examines the determinants of debt distress defined as periods in which countries resort to any of three forms of exceptional finance significant arrears on external debt paris club rescheduling and non concessional international monetary fund lending probit regressions show that three factors explain a substantial fraction of the cross country and time series variation in the incidence of debt distress the debt burden the quality of policies and institutions and shocks the relative importance of these factors varies with the level of development these results are robust to a variety of alternative specifications and the core specifications have substantial out of sample predictive power the quantitative implications of these results are examined for the lending strategies of official creditors

clustering and competition in asset markets economists financial commentators regulatory agencies and the legal community have recently criticized the nasdaq stock market inc because there is greater clustering of stock quotations on even eighths on nasdaq than on the new york stock exchange or the american stock exchange a phenomenon which critics attribute to collusion or some other defect in nasdaq market structure however as this article demonstrates clustering occurs in varying degrees in many other incontestably competitive financial markets including the nyse the amex the london stock exchange the london gold market and the international foreign exchange market this article provides a competitive theory of clustering that emphasizes the effect of uncertainty the size of transactions volatility and the informational and transactional roles of quotations on the degree of clustering in addition the article examines how market structure can affect the degree of clustering and considers the relation between clustering spread

credit growth current account and financial depth exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles although the effects of structural variables are deeply analysed a lesser attention has been paid to the impact of financial variables drawing on standard empirical current account models and with a large sample of industrial and developing countries we report a significant deterioration in the current account balance in case of an increase in the credit growth moreover we find that this link is substantially stronger for the developing ones motivating a closer examination therefore we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth in other words at the early stages of financial development acceleration in the credit growth might cause a larger deterioration in the current account balance thus it might be suggested that monetary policy and macro prudential

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

limit orders and the alleged nasdaq collusion abstract different methods are used by the nyse amex and the nasdaq to accomodate limit orders received from investors this accounts for at least part of the excess of nasdaq spreads over nyse spreads adjusted for trading volume and is a factor in determining this excess that is independent of collusion on the nasdaq the spread comparison evidence given by others to support their belief that there is collusion among market makers on the nasdaq therefore overstates the probability of collusion and its significance if it exists

third market reforms the overlooked goal of the sec s order handling rules in 1997 the securities and exchange commission enacted significant reforms in u s markets several studies document that the new order handling rules increased competition for nasdaq stocks but the reforms were designed with an additional goal in mind to increase quote competition for the trading of nyse listed securities on nasdaq i e third market trading an evaluation of the reforms in the third market indicates that they did not achieve this objective instead both quote quality and quoting frequency were diminished due primarily to elimination of the excess spread rule this suggests that more significant changes are needed to increase inter exchange competition

external liabilities and crises abstract we examine the determinants of external crises focusing on the role of foreign liabilities and their composition using a variety of statistical tools and comprehensive data spanning 1970 2011 we find that the ratio of net foreign liabilities to gdp is a significant crisis predictor this is primarily due to the net position in debt instruments the effect of net equity liabilities is weaker and net fdi liabilities seem if anything an offset factor we also find that i breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction ii the current account is a powerful predictor iii foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings and iv a parsimonious probit containing those and a handful of other variables has good predictive performance in and out of sample the latter result stems largely from our focus on external crises sensu stricto

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

a day end transaction price anomaly a large mean price change is observed on the last daily nyse transaction this suggests that closing prices may not consistently represent stock values transaction prices are studied to further characterize the day end price rise and to determine whether it is due to any limited subsample of stocks or dates the results indicate that the phenomenon is pervasive over most firms and days some evidence suggests that it is caused by a change in the frequency of ask prices at day end

balance sheet effects foreign reserves and public policies this paper shows that countries can use foreign reserves to enhance their domestic economies resilience to potential risks from balance sheet effects based on a theoretical model this paper demonstrates that the government can either deploy its foreign reserves to lend in foreign currency to the private sector or increase fiscal spending on domestic goods both these policy tools can remedy the bad equilibrium characterized by large scale domestic currency depreciation and very low aggregate investment but they diverge in how they stabilize the domestic economy and require different minimum amounts of foreign reserves targeted lending works by altering investors expectations of the domestic exchange rate and of firms net worth as long as foreign reserves are sufficient to cover the private sector s external debt this approach eliminates the bad equilibrium without an actual depletion of reserves in contrast fiscal spending increases the demand for domestic goods and affects the relative price leading to domestic exchange rate appreciation that subsequently increases firms net worth and facilitates investment

international financial integration and crisis contagion international financial integration helps to diversify risk but also may spread crises across countries we provide a quantitative analysis of this trade off in a two country general equilibrium model with collateral constrained borrowing using a global solution method borrowing constraints bind occasionally depending upon the state of the economy and levels of inherited debt we examine different degrees of international financial integration moving from financial autarky to bond and equity market integration financial integration leads to a significant increase in global leverage substantially escalates the probability of crises for any one country and dramatically increases the degree of contagion across countries outside of crises the impact of financial integration on macroeconomic aggregates is relatively small but the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky thus a trade off emerges between the probability of crises and the severity of crises using a large cross country database of financial crises in developing and developed economies over a forty year period we find evidence in support of the model

the financial crisis and the geography of wealth transfers abstract this paper studies the geography of wealth transfers between 2007q4 and 2008q4 at the height of the global financial crisis we construct valuation changes on bilateral external positions in equity direct investment and portfolio debt to measure who benefited and who lost on their external exposure we find a very diverse set of fortunes governed by the structure of countries external portfolios in particular we are able to relate the gains and losses on debt portfolios to the country s exposure to abs abcp conduits and the extent of dollar shortage

statistical properties of the roll serial covariance bid ask spread estimator exact small sample population moments of the standard serial covariance and variance estimators are derived under the assumptions of the roll bid ask spread model noise explains why serial covariance estimates are often positive in annual samples of daily and weekly returns small sample estimator bias partially explains why weekly estimates are more negative than daily estimates noise causes the roll spread estimator to be severely biased by jensen s inequality the french roll adjusted variance estimator is unbiased but noisy empirical tests confirm the major implications

the role of international reserves holding in buffering external shocks an extended literature analyzes the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s empirical studies on the self insurance motive suggest that high reserves economies are more resilient to financial crises and to international capital inflows volatility they show also that pre crisis foreign reserve accumulation explains post crisis growth however some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear meaning that reserve holding is subject to diminishing returns this paper devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks for a sample of 9 emerging economies we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap while a major part of the literature focuses on the global financial crisis we investigate this question by considering two sub periods 1995 2003 and 2004 2013 we implement threshold var tvar model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold we find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time hence the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified

predicting dax trends from dow jones data by methods of the mathematical theory of democracy abstract the mathematical theory of democracy operates on the indices of popularity and universality which are used to find socially optimal representatives and representative bodies regarded mathematically neither the society nor its representatives are necessarily human so that some objects can represent the behavior of other objects this idea is applied to predicting the dax trends german stock index from the actual dow jones data the current fluctuations of stock prices in new york are regarded as representative indicators of future stock price fluctuations in frankfurt in particular it is found that american express anticipates on the average the price fluctuations of 2 3 of the dax stocks the statistical significance of the null hypothesis that such a bias from the uncertainty 50 can occur by chance is only 3 5

did foreign exchange holding influence growth performance during the global financial crisis in a context of increased foreign exchange reserves holding from emerging and developing countries this paper investigates the diminishing return of reserves holding assumption over the most severe phase of the global financial crisis 2008q1 2010q4 relying on a panel smooth transition regression model we highlight the differential effect of the accumulation of foreign exchange reserves for a set of financial vulnerabilities variables specifically while reserve accumulation is effective above a critical threshold to cope with vulnerabilities related to the financial channel we show that it becomes less effective beyond a certain threshold for domestic bank vulnerabilities

forecasting volatility of the u s oil market abstract we examine the information content of the cboe crude oil volatility index ovx when forecasting realized volatility in the wti futures market additionally we study whether other market variables such as volume open interest daily returns bid ask spread and the slope of the futures curve contain predictive power beyond what is embedded in the implied volatility in out of sample forecasting we find that econometric models based on realized volatility can be improved by including implied volatility and other variables our results show that including implied volatility significantly improves daily and weekly volatility forecasts however including other market variables significantly improves daily weekly and monthly volatility forecasts

can leading indicators assess country vulnerability evidence from the 2008 09 global financial crisis abstract we investigate whether leading indicators can help explain the cross country incidence of the 2008 09 financial crisis rather than looking for indicators with specific relevance to the recent crisis the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators our motivation is to address suspicions that indicators found to be useful predictors in one round of crises are typically not useful to predict the next round the review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and episodes in the past for the 2008 09 crisis we use six different variables to measure crisis incidence drops in gdp and industrial production currency depreciation stock market performance reserve losses and participation in an imf program we find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008 09 crisis in line with the conclusions of the pre 2008 literature in addition to reserves recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis we define the period of the global financial shock as running from late 2008 to early 2009 which probably explains why we find stronger results than earlier papers such as obstfeld et al 2009 2010 and rose and spiegel 2009a b 2010 2011 which use annual data

international capital flows and the boom bust cycle in spain we study the joint dynamics of foreign capital flows and real activity during the recent boom bust cycle of the spanish economy using a three country new keynesian model with credit constrained households and firms a construction sector and a government we estimate the model using 1995q1 2013q2 data for spain the rest of the euro area rea and the rest of the world we show that falling risk premia on spanish housing and non residential capital a loosening of collateral constraints for spanish households and firms as well as a fall in the interest rate spread between spain and the rea fuelled the spanish output boom and the persistent rise in foreign capital flows to spain before the global financial crisis during and after the global financial crisis falling house prices and a tightening of collateral constraints for spanish borrowers contributed to a sharp reduction in capital inflows and to the persistent slump in spanish real activity the credit crunch was especially pronounced for spanish households firm credit constraints tightened later and more gradually and contributed much less to the slump

revisiting the home bias puzzle downside equity risk deviations from normality in financial return series have led to the development of alternative portfolio selection models one such model is the downside risk model whereby the investor maximizes his return given a downside risk constraint in this paper we empirically observe the international equity allocation for the downside risk investor using nine international markets returns over the last 34 years the results hold for both daily and monthly data and also from an international perspective due to greater downside risk investors may think globally but instead act locally the model s results therefore provide an alternative view of the home bias puzzle

private capital flows capital controls and default risk abstract what has been the effect of the shift in emerging market capital flows toward private sector borrowers are emerging market capital flows more efficient if not can controls on capital flows improve welfare this paper shows that the answers depend on the form of default risk when private loans are enforceable but there is the risk that the government will default on behalf of all residents private lending is inefficient and capital controls are potentially pareto improving however when private agents may individually default capital flow subsidies are potentially pareto improving

the great moderation in international capital flows a global phenomenon abstract this paper highlights a recent great moderation in global capital flows characterised by smaller volumes and lower volatility of cross border transactions however there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005 06 immediately prior to the onset of the global financial crisis to the post crisis period of 2013 14 when global flows arguably settled at a new normal we find that since the pre crisis period gross capital inflows recovered more for economies with smaller pre crisis external and internal imbalances lower per capita income improving growth expectations a less severe impact of the global financial crisis and less stringent macroprudential policy on the asset side countries with a more accommodative monetary policy a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post crisis period

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

fails to deliver short selling and market quality we investigate the aggregate market quality impact of equity shares that fail to deliver hereafter ftds for a sample of 1 492 nyse stocks over a 42 month period from 2005 to 2008 greater ftds lead to higher liquidity and pricing efficiency and their impact is similar to our estimate of delivered short sales furthermore during the operative period of a security and exchange commission sec order mandating stock borrowing prior to short sales the securities affected display relatively lower liquidity and higher pricing errors finally we do not find any evidence that ftds caused price distortions or the failure of financial firms during the 2008 financial crisis

for a few dollars more reserves and growth in times of crises abstract based on a dataset of 112 emerging economies and developing countries this paper addresses the question whether the accumulation of international reserves has effectively protected countries during the 2008 09 financial crisis more specifically the paper investigates the relation between international reserves and the existence of capital controls we find that the level of reserves matters countries with high reserves relative to short term debt suffered less from the crisis particularly when associated with a less open capital account this suggests some degree of complementarity between reserve accumulation and capital controls

the initiation and withdrawal of odd eighth quotes among nasdaq stocks an empirical analysis christie and schultz 1994 journal of finance 49 1813 1840 nd that market makers in many active nasdaq stocks avoid odd eighth quotes this paper studies 67 58 nasdaq stocks whose market makers initiate withdraw odd eighth quotes these regime shifts are often completed within the span of a day and coincide with dramatic changes in dollar percentage and e ective spreads in most cases we are unable to identify comparable changes in the costs of making markets we do identify long run changes in average prices that may provide a partial explanation however we also nd

xetra efficiency evaluation and nasdaq modelling by kapsyn abstract in this paper we give an introduction to capital market synergetics a model enabling us to compute transaction costs and investigate the operating efficiency of a stock market s microstructure frankfurt s trading system xetra and nasdaq are currently implemented into the computer program kapsyn by using kapsyn we examine xetra s behaviour in different market scenarios particularly the designated sponsor s performance the empirical evidence of the kapsyn parameter setting chosen is validated connecting the parameter setting to economic data by using neural networks and analytical reasoning underlie the definition of market scenarios the designated sponsor s eminent importance in non liquid markets has been demonstrated very impressively finally nasdaq s transaction cost statistics are investigated in the above scenarios compared to xetra nasdaq exhibits minimal transaction costs for mid size trades while transaction costs for small and block trades are nearly 100 50 higher

benchmarks for net international investment positions abstract applied analysis aimed at assessing which value of the niip is appropriate for a given country is relatively scarce and the few existing papers on the topic estimate one size fits all niip benchmarks e g catao and milesi ferretti 2014 this paper estimates country specific niip benchmarks on a sample of 65 advanced and emerging economies according to two different criteria consistency with economic fundamentals niip norms obtained as cumulated current account norms and prudence against the risk of external crises niip prudential thresholds obtained as the threshold of the niip variable interacted with relative income per capita that maximises signal power in predicting external crises the median for the country specific niip norms is around 17 of gdp while the median for prudential threshold is about 44 the two benchmarks are negatively correlated across countries highlighting a tension between factors underpinning the scope for external borrowing and debt tolerance gaps between actual and niip benchmarks are highly persistent but help predicting subsequent medium term niip changes better than the niip level thus confirming the usefulness of country specific reference values the adjustment of the niip in response to niip gaps is asymmetric with a significant adjustment limited to negative gaps with the exception of countries with a positive net position in foreign currency

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

competition and collusion in dealer markets this article develops a game theoretic model to analyze market makers intertemporal pricing strategies we show that dealers who adopt noncooperative pricing strategies may set bid ask spreads above competitive levels this form of implicit collusion differs from explicit collusion where dealers cooperate to fix prices price discreteness or asymmetric information are not required for collusion to occur rather institutional arrangements that restrict access to the order flow are important determinants of the ability to collude because they reduce dealers incentives to compete on price public policy efforts to increase interdealer competition should focus on such restrictions

global imbalances from a stock perspective the asymmetry between creditors and debtors abstract after the global financial crisis a reduction in global current account flow imbalances was observed still global disequilibria as measured in terms of countries net foreign assets stock imbalances kept increasing this paper explores the link between stock and flow imbalances our results show that stock imbalances are self correcting or stabilizing in debtor countries but self feeding or destabilizing in creditor countries in debtor economies the negative net foreign asset position improves the current account balance helping to limit the accumulation of net external debt in creditor countries the positive net foreign asset position also improves the current account leading to additionally increasing net external assets the decomposition of the current account reveals that the income balance widens stock imbalances in both cases the asymmetry between creditors and debtors is explained by the differential behavior of the trade balance which fails to adjust in the case of creditors

current account deficits during heightened risk menacing or mitigating large current account deficits and the corresponding reliance on capital flows from abroad can increase a country s vulnerability to periods of heightened risk we develop a framework to evaluate such vulnerabilities and clarify which characteristics of a country s international investment portfolio determine whether a current account deficit is menacing or mitigating financial factors namely international investment income and valuation changes on international investments are critical our framework explores how domestic and global risk shocks affect these factors an application to 10 oecd economies shows that a substantial degree of international risk sharing can occur through current accounts and international portfolios

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

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

modelling the effects of immigration on regional economic performance and wage distribution a computable general equilibrium cge analysis of three european union regions pouliakas k roberts d balamou e and psaltopoulos d modelling the effects of immigration on regional economic performance and wage distribution a computable general equilibrium cge analysis of three european union regions regional studies the paper uses a regional computable general equilibrium cge model to analyse the effects of immigration on three small remote european union regions located within scotland uk greece and latvia two migration scenarios are assessed in the first total labour supply is affected in the second the importance of migratory flows by differential labour skill types is investigated the results indicate significant differences in the extent to which regional economies are affected by immigration they also suggest that remote regions are highly vulnerable to the out migration of skilled workers brain drain while the in migration of unskilled workers leads to widening wage inequality

regulatory and legal pressures and the costs of nasdaq trading the nasdaq market came under intense pressure from regulators and class action lawsuits following allegations of tacit collusion by christie and schultz 1994 this article examines the changes in transaction costs on the nasdaq from january 1993 through june 1996 using 16 million trades in 30 stocks effective spreads cannot be matched however the autocovariance spread estimator of roll 1984 works well with intraday data over this period this spread estimator reveals that trading costs declined significantly for 29 of the 30 stocks over 1993 96 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

persistent gaps and default traps we show how vicious circles in countries credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks in such an environment default signals the borrower s vulnerability to adverse shocks and creates a pessimistic growth outlook this translates into higher interest spreads and debt servicing costs relative to income raising the cost of future repayments thereby creating default traps we build a long and broad cross country dataset to show the existence of a history dependent default premium and of significant effects of output persistence on sovereign creditworthiness consistent with the model s predictions

cross border returns differentials were the u s to persistently earn substantially more on its foreign investments u s claims than foreigners earn on their u s investments u s liabilities the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases however we find that the returns differential of u s claims over u s liabilities is far smaller than previously reported and importantly is near zero for portfolio equity and debt securities for portfolio securities we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of u s investors and the u s equity and bond portfolios of foreign investors in the context of equity and bond portfolios we find no evidence that the u s can count on earning more on its claims than it pays on its liabilities finally we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits the net international investment position and the net income balance jel codes f3

competition among trading venues information and trading on electronic communications networks this paper explores the competition between two trading venues electronic communication networks ecns and nasdaq market makers ecns oier the advantages of anonymity and speed of execution which attract informed traders thus trades are more likely to occur on ecns when information asymmetry is greater and when trading volume and stock return volatility are high ecn trades have greater permanent price impacts and more private information is revealed through ecn trades than though market maker trades however ecn trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and oier them better executions technological innovations that enable high speed low cost electronic trading systems are dramatically changing the structure of nancial markets exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems trading volume on electronic communications networks ecns has grown rapidly over the past several years ecns are now involved in more than a third of nasdaq trading volume and are attempting to increase their market share in nyse listed

preferencing internalization of order flow and tacit collusion evidence from experiments this paper examines preferencing arrangements and tacit collusion in laboratory asset markets in the experiments dealers may internalize by matching the best quote or by passing orders to the dealer posting the best quote although some markets were highly competitive several markets reached a collusive equilibrium with wide spreads and near complete intemalization of order flow the paper further examines the role of market transparency and passed order flow on quote setting behavior and suggests that these affect the mechanism leading to tacitly collusive equilibria

trade execution costs and market quality after decimalization this study assesses trade execution costs and market quality for nyse and nasdaq stocks before and after the 2001 change to decimal pricing several theoretical predictions are confirmed quoted bid ask spreads declined substantially on each market with the largest declines for heavily traded stocks the percentage of shares receiving price improvement increased on the nyse but not on nasdaq however those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization and trades completed outside the quotes saw the largest reductions in trade execution costs as a class effective bid ask spreads as a percentage of share price arguably the most relevant measure of execution costs for smaller trades averaged 0 33 on a volume weighted basis after decimalization for both nyse and nasdaq stocks there is no evidence of systematic intraday reversals of quote changes on either market as would be expected if decimalization had damaged liquidity supply

cross border listings and price discovery evidence from u s listed canadian stocks we examine the contribution of cross listings to price discovery for a sample of canadian stocks listed on both the toronto stock exchange tse and a u s exchange we nd that priceson the tse and u s exchange are cointegrated and mutually adjusting the u s share of price discovery ranges from 0 2 percent to 98 2 percent with an average of 38 1 percent the u s share is directly related to the u s share of trading and to the ratio of proportions of informative tradeson the u s exchange and the tse and inversely related to the ratio of bid ask spreads with the enhanced globalization of nancial markets the number of non u s rms cross listing shares on a u s exchange has substantially increased attracting non u s listings is now a top priority of the u s stock exchanges at the end of 2000 420 non u s rmswere listed on the new york stock exchange nyse the number of foreign rmslisted on nasdaq waseven higher the popularity of international cross listings has prompted many academic studies on the topic 1 most of these studies focus on the bene ts of international cross listings including the reduced cost of capital and the enhanced liquidity of a rm s stock studiessuch asalexander eun and janakiramanan 1987 1988 and foerster and karolyi 1993 suggest that the cost of capital declines because the portion of the risk premium that compensates for cross border investment barriers dissipates miller 1999 and foerster and karolyi 1999 propose increased investor recognition as another possible explanation several studies examine changes in trading volume and costs due to international cross listing foerster and karolyi 1998 nd that the bid ask spreads in canada decrease after the cross listing of canadian stocks in the united states domowitz glen and madhavan 1998 suggest that the impact of cross listing is complex and depends on the degree of quote transparency that is the extent to which price information is observable in the two markets smith and so anos 1997 examine if cross listing is a zerosum game with increased trading in the united states being oiset by reduced

why nasdaq market makers avoid odd eighth quotes recent studies argue that implicit collusion explains the tendency of nasdaq market makers to avoid odd eighth price quotes this paper focuses on the role that preference trading plays in determining quoted spreads under the postulated effects of preference trading an analysis of the relation between spreads and price fractions explains the paucity of odd eighth quotes on nasdaq empirical results from a comprehensive data set show that exogenous economic characteristics explain the distribution of price fractions across securities and illustrate the stability of that distribution over time these results contradict empirical results offered as support for the collusion hypothesis

rules of thumb for sovereign debt crises abstract this paper investigates the economic and political conditions that are associated to the occurrence of a sovereign debt crisis we use a new statistical approach classification and regression tree that allows us to derive a collection of rules of thumb that help identify the typical characteristics of defaulters we find that not all crises are equal they differ depending on whether the government faces insolvency illiquidity or various macroeconomic risks we also characterize the set of fundamentals that can be associated with a relatively risk free zone this classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction

do liquidity measures measure liquidity abstract given the key role of liquidity in finance research identifying high quality proxies based on daily as opposed to intraday data would permit liquidity to be studied over relatively long timeframes and across many countries using new measures and widely employed measures in the literature we run horseraces of annual and monthly estimates of each measure against liquidity benchmarks our benchmarks are effective spread realized spread and price impact based on both trade and quote taq and rule 605 data we find that the new effective realized spread measures win the majority of horseraces while the amihud 2002 illiquidity and stock returns cross section and time series effects journal of financial markets 5 31 56 measure does well measuring price impact

island goes dark transparency fragmentation and regulation responding to a september 2002 regulatory enforcement the island electronic communications network stopped displaying its limit order book in the three most active exchange traded funds etfs where it was the dominant venue island s share of trading activity and price discovery fell fragmenting the market etf prices adjust more slowly when island goes dark and there is substantial price discovery movement from etfs to the futures market trading costs increase on island and decrease off island with higher trading costs overall when island later redisplays its orders market quality improves with transparency and the reduction in fragmentation both playing important roles copyright 2005 oxford university press

tick size bid ask spreads and market structure we propose a link between market structure and the resulting market characteristics tick size bid ask spreads quote clustering and market depth we analyze transactions data of stocks traded on the london stock exchange a dealer market we conclude that market charateristics are endogenous to the market structure the london dealer market does not have a mandated tick size and it exhibits higher spreads higher quote clusterings and higher market depth than the nyse auction market clustering of trade prices is similar in london and new york

tick size and spreads the case of nasdaq s decimalization abstract recent studies by the securities and exchange commission sec and by academics have provided empirical evidence that nasdaq trade execution costs are still higher than for instance on the nyse introducing decimal pricing is one concrete plan to enhance nasdaq s competitiveness however effects of tick size changes are difficult to predict for that reason models have been required for quite a while capital market synergetics is appropriate to investigate the effects of market microstructure changes in this paper we examine the impact of a variation in nasdaq s minimum price increment on quoted spreads first our findings confirm the numerical value of the decline in the average quoted spread in 1997 as an immediate effect of reducing the tick size from 1 8 to 1 16 this strongly affirms the reliability of our calculation results second by applying the same research design again we investigate the impact of a further reduction in the tick size to 1 100 no such study is available at the moment the expected changes in the average quoted spreads due to the reduction in the tick size from 1 16 to 1 100 the change through decimalization range from an increase of 2 82 to a decrease of 15 51 derived by applying the same method again the figures embody a reliable forecast of the real effects and are therefore of eminent importance to academics and to practitioners as well

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

international reserves and the maturity of external debt abstract this paper studies how the level of international reserves affects the maturity structure of external debt we show in an illustrative theoretical model that reserves lengthen the maturity of external debt via a flattening of the yield curve using data of 66 emerging and developing countries and applying different econometric approaches we find robust evidence that reserves increase the share of long term in total external debt results hold for private and public external debt individually taking reserves and their effect on the debt maturity structure together they reinforce financial stability

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

economic impacts of a property tax limitation a computable general equilibrium analysis of oregon s measure 5 a state level computable general equilibrium cge model was used to investigate economic adjustment to a property tax limitation in oregon findings under two cge model variants are compared with results using a fixed price input output type model the analysis suggests that 1 total output and income increase under the limitation with high income households benefitting most and low income households least 2 even with income growth total state and local government tax revenues and spending shrink significantly 3 the limitation makes oregon s tax system slightly less progressive at the top of the income distribution but slightly more progressive at the bottom

location matters an examination of trading profits the electronic trading system xetra of the german security exchange provides a unique data source on the equity trades of 756 professional traders located in 23 different cities and eight european countries we explore informational asymmetries across the trader population traders located outside germany in non german speaking cities show lower proprietary trading profit their underperformance is not only statistically significant it is also of economically significant magnitude and occurs for the 11 largest german blue chip stocks we also examine whether a trader location in frankfurt as the financial center or local proximity of the trader to the corporate headquarters of the traded stock or affiliation with a large financial institution results in superior trading performance the data provide no evidence for a financial center advantage or of increasing institutional scale economies in proprietary trading however we find evidence for an information advantage due to corporate headquarters proximity for high frequency intraday trading

europe and global imbalances although europe in the aggregate is not a major contributor to global current account imbalances its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses we assess the macroeconomic impact on europe of global current account adjustment under alternative scenarios emphasizing both trade and financial channels finally we consider heterogeneous exposure across individual european economies to external adjustment shocks philip r lane and gian maria milesi ferretti

the market liquidity of diamonds q s and their underlying stocks abstract we investigate the market liquidity effects of the introduction of index tracking stocks for the dow jones industrial average diamonds and the nasdaq 100 index q s our main finding is liquidity of the underlying djia 30 index stocks improves after the introduction of the exchange traded fund largely because of a decline in the cost of informed trading further we find the diamonds has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks again primarily because of lower adverse selection costs finally we find weaker but qualitatively similar results for the q s

regional balance of payments problems an interpretation ho l s 1993 regional balance of payments problems an interpretation reg studies 27 457 466 this paper lays out a simple model and an accounting framework for analysing the relationship between different components of regional savings and investment between internal savings and external savings and between government sector savings and private sector savings in general stepping up investment to enhance regional growth must cause a deterioration of the regional trade balance in the short run even though the trade balance is likely to improve in the longer run analyses in recent years often ignore the effect of capital formation on trade as an example the german unification in requiring a rebuilding of capital stock suddenly rendered obsolete by a major change in relative factor prices requires a real appreciation of the dm and a deterioration of the german trade balance given nominal exchange rates this means higher german inflation than its trading partners on the other hand the pape

payments for order flow on nasdaq we present a model of nasdaq that includes the two ways in which marketmakers compete for order f low quotes and direct payments brokers in our model can execute small trades through a computerized system preferencing arrangements with marketmakers or vertical integration into market making the comparative statics in our model differ from those of the traditional model of dealer markets which does not capture important institutional features of nasdaq we also show that the empirical evidence is inconsistent with the traditional model which suggests that preferencing and vertical integration are important components in understanding nasdaq

towards a new early warning system of financial crises abstract this paper develops a new early warning system ews model based on a multinomial logit model for predicting financial crises it is shown that commonly used ews approaches which use binomial discrete dependent variable models are subject to what we call a post crisis bias this bias arises when no distinction is made between tranquil periods when economic fundamentals are largely sound and sustainable and crisis post crisis periods when economic variables go through an adjustment process before reaching a more sustainable level or growth path we show that applying a multinomial logit model which allows distinguishing between more than two states is a valid way of solving this problem and constitutes a substantial improvement in the ability to forecast financial crises the empirical results reveal that for a set of 20 open emerging markets for the period 1993 2001 the model would have correctly predicted a large majority of crises in emerging markets

search in asset markets market structure liquidity and welfare this paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market to this end we generalize the search theoretic model of financial intermediation of darrell duffie et al 2005 to allow for entry of dealers and unrestricted asset holdings

a comparison of centralized and fragmented markets with costly search how does quotation transparency affect financial market performance biais s irrelevance proposition in 1993 shows that centralized markets yield the same expected bid ask spreads as fragmented markets other things equal however de frutos and manzano demonstrated in 2002 that expected spreads in fragmented markets are smaller and market participants prefer to trade in fragmented markets this paper introduces liquidity traders costs of searching for a better quote into the biais model and derives opposite conclusions to these previous studies expected spreads in centralized markets are smaller and liquidity traders prefer centralized markets while market makers prefer fragmented markets

current accounts in debtor and creditor countries the authors reexamine a classic question in international economics what is the current account response to a transitory income shock such as a temporary improvement in the terms of trade a transfer from abroad or unusually high production to answer this question they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities despite its conventional ingredients the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries evidence from thirteen oecd countries broadly supports this theoretical prediction

cross country causes and consequences of the crisis an update abstract we update rose and spiegel forthcoming rose and spiegel 2010 and search for simple quantitative models of macroeconomic and financial indicators of the great recession of 2008 09 we use a cross country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars we check a number of different indicators of crisis intensity and a variety of different country samples while countries with higher income and looser credit market regulation seemed to suffer worse crises we find few clear reliable indicators in the pre crisis data of the incidence of the great recession countries with current account surpluses seemed better insulated from slowdowns

external shocks consumption smoothing and capital mobility in india evidence from an intertemporal optimization approach we examine the solvency of india s current account ca in the post liberalization period using intertemporal optimization approach to the ca using quarterly data ranging from 1996q1 to 2014q2 we

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

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

dealer liquidity in an auction market evidence from the london stock exchange we analyse the trade characteristics and market conditions which determine the market share of a continuous auction trading system at the london stock exchange where a network of broker dealer firms is also available for trade we show that execution and information risks govern the choice of execution venue further we uncover strong commonality in the market share of the order book across stocks and find that variables proxying for market wide liquidity and informational risks also affect the choice of trading venue our results suggest that competing off book liquidity suppliers voluntarily perform at least some of the stabilisation functions normally assigned to designated market makers

are currency crises predictable abstract this paper studies whether exchange rate expectations and overvaluations are predictors of currency crises the results suggest that overvaluation has predictive power in explaining the crises however although expected depreciation obtained from survey data partially takes different exchange rate misalignment measures into consideration expectations fail to anticipate currency crises

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

financial instability reserves and central bank swap lines in the panic of 2008 in this paper we connect the events of the last twelve months the panic of 2008 as it has been called to the demand for international reserves in previous work we have shown that international reserve demand can be rationalized by a central bank s desire to backstop the broad money supply to avert the possibility of an internal external double drain a bank run combined with capital flight thus simply looking at trade or short term debt as motivations for reserve holdings is insufficient one must also consider the size of the banking system m2 here we show that a country s reserve holdings just before the current crisis relative to their predicted holdings based on these financial motives can significantly predict exchange rate movements of both emerging and advanced countries in 2008 countries with large war chests did not depreciate and some appreciated meanwhile those who held insufficient reserves based on our metric were likely to depreciate current account balances and short term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account our model s typically high predicted reserve levels provide important context for the unprecedented u s dollar swap lines recently provided to many countries by the federal reserve this abstract was borrowed from another version of this item

the capital account and regional balance of payments problems many regional issues can be expressed in terms of regional balance of payments accounts this framework in turn highlights a feature of regional economics to which little attention is paid inter regional capital flows it is the presumption that these flows accommodate demand which explains the apparent absence of regional balance of payments problems in fact if capital flows are not accommodating then regional balance of payments problems may be more serious than for countries with separate currencies since they require income adjustment having explained the balance of payments accounts in regional terms and the nature and significance of inter regional capital flows the paper concludes with a discussion of data requirements with particular reference to the scottish case

the shrinking merger arbitrage spread reasons and implications the merger arbitrage spread has declined by more than 400 bps since 2002 this decline which is both economically and statistically significant corresponds to the decline in aggregate returns of merger arbitrage hedge funds as well as increased inflows into merger arbitrage hedge funds part of the decline in the arbitrage spread may be explained by increased trading in the targets stocks following the merger announcement reduced transaction costs and changes in risk related to merger arbitrage these findings suggest that some of the decline is likely to be permanent therefore investors seeking to invest in merger arbitrage hedge funds should focus on returns since 2002

the drivers of financial globalization over the past decade emerging markets have accounted for a growing fraction of world gdp and international trade reflecting fast growth in china and india but also strong economic performance across the board and the spec tacular increase in foreign exchange reserve holdings the growing importance of sovereign wealth funds and the pattern of global imbal ances more generally suggest that these coun tries are also playing a major role in financial globalization

does the current account still matter do global current account imbalances still matter in a world of deep international financial markets where gross two way financial flows often dwarf the net flows measured in the current account contrary to a complete markets or consenting adults view of the world large current account imbalances while very possibly warranted by fundamentals and welcome can also signal elevated macroeconomic and financial stresses as was arguably the case in the mid 2000s furthermore the increasingly big valuation changes in countries net international investment positions while potentially important in risk allocation cannot be relied upon systematically to offset the changes in national wealth implied by the current account the same factors that dictate careful attention to global imbalances also imply however that data on gross international financial flows and positions are central to any assessment of financial stability risks the balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability much more so than do global imbalances though the imbalances may well be a symptom that deeper financial threats are gathering

international currency exposures valuation effects and the global financial crisis abstract we examine the evolution of international currency exposures with a particular focus on the 2002 12 period during the run up to the global financial crisis there was a widespread shift towards positive net foreign currency positions such that relatively few countries exhibited the archetypal emerging market short foreign currency position on the eve of the global financial crisis during the crisis the upheaval in currency markets generated substantial currency generated valuation effects much of which were not reversed there is some evidence that the distribution of valuation effects was stabilizing in the sense of showing a negative covariation pattern with pre crisis net foreign asset positions