This paper studies the implications of correlation of private signals about the liquidation value of a risky asset in a variation of a standard noisy rational expectations model in which traders receive endowment shocks which are private information and have a common component. We …nd that a necessary condition to generate multiple linear partially revealing rational expectations equilibria is the existence of several sources of information dispersion. In this context equilibrium multiplicity tends to occur when information is more dispersed. A necessary condition to have strategic complementarity in information acquisition is to have mul- tiple equilibria. When the equilibrium is unique there is strategic substi- tutability in information acquisition, corroborating the result obtained in Grossman and Stiglitz (1980). JEL Classi…cation: D82, D83, G14 Keywords: Multiplicity of equilibria, strategic complementarity, asym- metric information.
{"title":"Information Dispersion and Equilibrium Multiplicity","authors":"Carolina Manzano Tovar, X. Vives","doi":"10.2139/ssrn.1344305","DOIUrl":"https://doi.org/10.2139/ssrn.1344305","url":null,"abstract":"This paper studies the implications of correlation of private signals about the liquidation value of a risky asset in a variation of a standard noisy rational expectations model in which traders receive endowment shocks which are private information and have a common component. We …nd that a necessary condition to generate multiple linear partially revealing rational expectations equilibria is the existence of several sources of information dispersion. In this context equilibrium multiplicity tends to occur when information is more dispersed. A necessary condition to have strategic complementarity in information acquisition is to have mul- tiple equilibria. When the equilibrium is unique there is strategic substi- tutability in information acquisition, corroborating the result obtained in Grossman and Stiglitz (1980). JEL Classi…cation: D82, D83, G14 Keywords: Multiplicity of equilibria, strategic complementarity, asym- metric information.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132893616","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We predict a positive relationship between the liquidity of the firm's assets and the liquidity of its stock. This relationship depends on market expectations regarding the deployment of the firm's liquid assets. Thus our hypothesis links stock liquidity to managerial actions that change the liquidity of the firm's assets, such as investment, financing, and payout. Consistent with our prediction, we find that after controlling for firm fixed effects, a one standard deviation increase in asset liquidity increases stock liquidity by 14.5%. The relation is stronger when the manager is less likely to convert liquid assets into illiquid assets such as for low market to book and low capital expenditure firms, during economic recessions, and when expected payout is high. Apart from linking corporate finance decisions to stock liquidity, the analysis also promotes a new rationale for several empirical regularities such as the commonality in stock liquidity, and the improvement in stock liquidity following equity issuances.
{"title":"Managerial Decisions, Asset Liquidity, and Stock Liquidity","authors":"R. Gopalan, Ohad Kadan, Mikhail Pevzner","doi":"10.2139/ssrn.1342706","DOIUrl":"https://doi.org/10.2139/ssrn.1342706","url":null,"abstract":"We predict a positive relationship between the liquidity of the firm's assets and the liquidity of its stock. This relationship depends on market expectations regarding the deployment of the firm's liquid assets. Thus our hypothesis links stock liquidity to managerial actions that change the liquidity of the firm's assets, such as investment, financing, and payout. Consistent with our prediction, we find that after controlling for firm fixed effects, a one standard deviation increase in asset liquidity increases stock liquidity by 14.5%. The relation is stronger when the manager is less likely to convert liquid assets into illiquid assets such as for low market to book and low capital expenditure firms, during economic recessions, and when expected payout is high. Apart from linking corporate finance decisions to stock liquidity, the analysis also promotes a new rationale for several empirical regularities such as the commonality in stock liquidity, and the improvement in stock liquidity following equity issuances.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123645222","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using complete order books from the Korea Stock Exchange for a four-year period including the 1997 Asian financial crisis, we observe (not estimate) limit order demand and supply curves for individual stocks. Both curves have demonstrably finite elasticities. These fall markedly, by about 40%, with the crisis and remain depressed long after other economic and financial variables revert to pre-crisis norms. Superimposed upon this common long-term modulation, individual stocks' supply and demand elasticities correlate negatively at high frequencies. That is, when a stock exhibits an unusually elastic demand curve, it tends simultaneously to exhibit an unusually inelastic supply curve, and vice versa. These findings have potential implications for modeling how information flows into and through stock markets, how limit order providers react or interact to information flows, how new information is capitalized into stock prices, and how financial crises alter these processes. We advance speculative hypotheses, and invite further theoretical and empirical work to explain these findings and their implications.
{"title":"Characteristics of Observed Limit Order Demand and Supply Schedules for Individual Stocks","authors":"Jung-wook Kim, Jason Lee, R. Morck","doi":"10.3386/W14733","DOIUrl":"https://doi.org/10.3386/W14733","url":null,"abstract":"Using complete order books from the Korea Stock Exchange for a four-year period including the 1997 Asian financial crisis, we observe (not estimate) limit order demand and supply curves for individual stocks. Both curves have demonstrably finite elasticities. These fall markedly, by about 40%, with the crisis and remain depressed long after other economic and financial variables revert to pre-crisis norms. Superimposed upon this common long-term modulation, individual stocks' supply and demand elasticities correlate negatively at high frequencies. That is, when a stock exhibits an unusually elastic demand curve, it tends simultaneously to exhibit an unusually inelastic supply curve, and vice versa. These findings have potential implications for modeling how information flows into and through stock markets, how limit order providers react or interact to information flows, how new information is capitalized into stock prices, and how financial crises alter these processes. We advance speculative hypotheses, and invite further theoretical and empirical work to explain these findings and their implications.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128470154","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-01-31DOI: 10.1111/j.1467-629X.2008.00279.x
Kiril Alampieski, A. Lepone
This paper examines the impact of a reduction in the minimum price increment on liquidity and execution costs in a futures market setting. In 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid-ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Further analysis reveals that execution costs are significantly reduced after the change. We conclude that a tick size reduction improves liquidity and reduces execution costs in a futures market setting.
{"title":"Impact of a Tick Size Reduction on Liquidity: Evidence from the Sydney Futures Exchange","authors":"Kiril Alampieski, A. Lepone","doi":"10.1111/j.1467-629X.2008.00279.x","DOIUrl":"https://doi.org/10.1111/j.1467-629X.2008.00279.x","url":null,"abstract":"This paper examines the impact of a reduction in the minimum price increment on liquidity and execution costs in a futures market setting. In 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid-ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Further analysis reveals that execution costs are significantly reduced after the change. We conclude that a tick size reduction improves liquidity and reduces execution costs in a futures market setting.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131456954","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We model and test for the role of heterogeneously informed, strategic multi-asset speculation for cross-price impact—the impact of trades in one asset on the prices of other (even unrelated) assets—in the U.S. stock market. Our investigation of the trading activity in New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotation System (NASDAQ) stocks between 1993 and 2004 reveals that, consistent with our model, (1) daily order imbalance in one industry or random stock has a significant, persistent, and robust impact on daily returns of other (even unrelated) industries or random stocks; (2) cross-price impact is often negative; and (3) both direct (i.e., an asset’s own) and absolute (i.e., unsigned) cross-price impact are smaller when speculators are more numerous, greater when market-wide dispersion of beliefs is higher, and greater among stocks dealt by the same specialist.
{"title":"Strategic Cross-Trading in the U.S. Stock Market","authors":"P. Pasquariello, Clara Vega","doi":"10.2139/ssrn.1333747","DOIUrl":"https://doi.org/10.2139/ssrn.1333747","url":null,"abstract":"We model and test for the role of heterogeneously informed, strategic multi-asset speculation for cross-price impact—the impact of trades in one asset on the prices of other (even unrelated) assets—in the U.S. stock market. Our investigation of the trading activity in New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotation System (NASDAQ) stocks between 1993 and 2004 reveals that, consistent with our model, (1) daily order imbalance in one industry or random stock has a significant, persistent, and robust impact on daily returns of other (even unrelated) industries or random stocks; (2) cross-price impact is often negative; and (3) both direct (i.e., an asset’s own) and absolute (i.e., unsigned) cross-price impact are smaller when speculators are more numerous, greater when market-wide dispersion of beliefs is higher, and greater among stocks dealt by the same specialist.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122583224","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Benjamin M. Blau, Bonnie F. Van Ness, R. Van Ness, R. Wood
We examine short selling of NYSE stocks that are listed on the S&P 500 on days when the index experiences dramatic price movements. While prior research shows that short sellers are generally contrarian in contemporaneous daily returns, we document that, after controlling for factors that influence the level of short selling in a particular stock, short activity is abnormally high (low) on large down (up) days when compared to non-down (non-up) days suggesting that short sellers trade in the direction the market moves. Further, we report that short sellers follow negative intraday returns on down days and positive intraday returns on up days. While we find some evidence of a negative relation between short activity and future intraday returns on down days, we do not find that short sellers on up days are able to predict negative intraday returns. However, we do show that short sellers on up days are better able to predict negative next day returns than short sellers on down days, suggesting that short sellers on up (down) days are more concerned with longer-term (shorter-term) price movements.
{"title":"Short Selling in Volatile Markets","authors":"Benjamin M. Blau, Bonnie F. Van Ness, R. Van Ness, R. Wood","doi":"10.2139/ssrn.1325430","DOIUrl":"https://doi.org/10.2139/ssrn.1325430","url":null,"abstract":"We examine short selling of NYSE stocks that are listed on the S&P 500 on days when the index experiences dramatic price movements. While prior research shows that short sellers are generally contrarian in contemporaneous daily returns, we document that, after controlling for factors that influence the level of short selling in a particular stock, short activity is abnormally high (low) on large down (up) days when compared to non-down (non-up) days suggesting that short sellers trade in the direction the market moves. Further, we report that short sellers follow negative intraday returns on down days and positive intraday returns on up days. While we find some evidence of a negative relation between short activity and future intraday returns on down days, we do not find that short sellers on up days are able to predict negative intraday returns. However, we do show that short sellers on up days are better able to predict negative next day returns than short sellers on down days, suggesting that short sellers on up (down) days are more concerned with longer-term (shorter-term) price movements.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129508974","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Volatility clustering, with autocorrelations of the hyperbolic decay rate, is unquestionably one of the most important stylized facts of financial time series. This paper presents a market microstructure model that is able to generate volatility clustering with hyperbolically decaying autocorrelations via traders with multiple trading frequencies, using Bayesian information updates in an incomplete market. The model illustrates that signal extraction, which is induced by multiple trading frequencies, can increase the persistence of the volatility of returns. Furthermore, we show that the volatility of the underlying time series of returns varies greatly with the number of traders in the market.
{"title":"Trading Frequency and Volatility Clustering","authors":"Yi Xue, R. Gencay","doi":"10.2139/ssrn.1365705","DOIUrl":"https://doi.org/10.2139/ssrn.1365705","url":null,"abstract":"Volatility clustering, with autocorrelations of the hyperbolic decay rate, is unquestionably one of the most important stylized facts of financial time series. This paper presents a market microstructure model that is able to generate volatility clustering with hyperbolically decaying autocorrelations via traders with multiple trading frequencies, using Bayesian information updates in an incomplete market. The model illustrates that signal extraction, which is induced by multiple trading frequencies, can increase the persistence of the volatility of returns. Furthermore, we show that the volatility of the underlying time series of returns varies greatly with the number of traders in the market.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115568440","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This note gives dynamic effects of discrete and continuous explanatory variables for count data or integer-valued moving average models. An illustration based on a model for the number of transactions in a stock is included.
{"title":"Effects of Explanatory Variables in Count Data Moving Average Models","authors":"Kurt Brannas, Carl Lönnbark","doi":"10.2139/ssrn.1313842","DOIUrl":"https://doi.org/10.2139/ssrn.1313842","url":null,"abstract":"This note gives dynamic effects of discrete and continuous explanatory variables for count data or integer-valued moving average models. An illustration based on a model for the number of transactions in a stock is included.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126503923","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We present a model in which issuers of asset backed securities choose to release coarse information to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention — mandatory transparency standards, provision of liquidity to distressed banks or secondary market price support — and find that they have quite different welfare implications. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.
{"title":"Securitization, Transparency and Liquidity","authors":"M. Pagano, P. Volpin","doi":"10.2139/ssrn.1337898","DOIUrl":"https://doi.org/10.2139/ssrn.1337898","url":null,"abstract":"We present a model in which issuers of asset backed securities choose to release coarse information to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention — mandatory transparency standards, provision of liquidity to distressed banks or secondary market price support — and find that they have quite different welfare implications. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129095179","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates how trading frictions vary with the thickness of the asset market by examining patterns of asset allocations and prices in commercial aircraft markets. The empirical analysis indicates that assets with a thinner market are less liquid -- i.e., more difficult to sell. Thus, firms hold on longer to them amid profitability shocks. Hence, when markets for assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are lower and have a higher dispersion. (JEL A12, L11, L93)
{"title":"The Role of Trading Frictions in Real Asset Markets","authors":"A. Gavazza","doi":"10.2139/ssrn.1003998","DOIUrl":"https://doi.org/10.2139/ssrn.1003998","url":null,"abstract":"This paper investigates how trading frictions vary with the thickness of the asset market by examining patterns of asset allocations and prices in commercial aircraft markets. The empirical analysis indicates that assets with a thinner market are less liquid -- i.e., more difficult to sell. Thus, firms hold on longer to them amid profitability shocks. Hence, when markets for assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are lower and have a higher dispersion. (JEL A12, L11, L93)","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131094626","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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