Pub Date : 2025-06-01DOI: 10.1016/j.finmar.2025.100981
Pietro Bonaldi , Mauricio Villamizar-Villegas
This study examines how inventory control and private information affect trading prices and volumes in a centralized interdealer foreign exchange (FX) market. Using exogenous variation from FX auctions conducted by the Colombian Central Bank (2008–2014), we analyze settlement data from the COP/USD spot market before and after each auction. Comparing dealers with differing inventory and information shocks, we find that those with reduced inventories increase net USD purchases and pay higher prices post-auction.
{"title":"Auction-based tests of inventory control and private information in a centralized interdealer FX market","authors":"Pietro Bonaldi , Mauricio Villamizar-Villegas","doi":"10.1016/j.finmar.2025.100981","DOIUrl":"10.1016/j.finmar.2025.100981","url":null,"abstract":"<div><div>This study examines how inventory control and private information affect trading prices and volumes in a centralized interdealer foreign exchange (FX) market. Using exogenous variation from FX auctions conducted by the Colombian Central Bank (2008–2014), we analyze settlement data from the COP/USD spot market before and after each auction. Comparing dealers with differing inventory and information shocks, we find that those with reduced inventories increase net USD purchases and pay higher prices post-auction.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"74 ","pages":"Article 100981"},"PeriodicalIF":2.1,"publicationDate":"2025-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144223650","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-06-01DOI: 10.1016/j.finmar.2025.100972
Xue-Zhong He , Junqing Kang
Speed competition incentivizes fast traders to trade earlier and temporally fragments the price discovery process. Large traders internalize their price impact and screen trading aggressiveness to resolve the pre-trading uncertainty proportional to the number of traders. Therefore, price discovery in the late period depends on the number of slow traders and the amount of fundamental uncertainty resolved by fast traders. A concentration of fast or slow traders harms price discovery in the late period, generating hump-shape overall price informativeness to speed competition. With fast information diffusion, speed competition harms the overall price informativeness, unless fast traders are high-frequency traders.
{"title":"Speed competition and strategic trading","authors":"Xue-Zhong He , Junqing Kang","doi":"10.1016/j.finmar.2025.100972","DOIUrl":"10.1016/j.finmar.2025.100972","url":null,"abstract":"<div><div>Speed competition incentivizes fast traders to trade earlier and temporally fragments the price discovery process. Large traders internalize their price impact and screen trading aggressiveness to resolve the pre-trading uncertainty proportional to the number of traders. Therefore, price discovery in the late period depends on the number of slow traders and the amount of fundamental uncertainty resolved by fast traders. A concentration of fast or slow traders harms price discovery in the late period, generating hump-shape overall price informativeness to speed competition. With fast information diffusion, speed competition harms the overall price informativeness, unless fast traders are high-frequency traders.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"74 ","pages":"Article 100972"},"PeriodicalIF":2.1,"publicationDate":"2025-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144223651","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-03-01DOI: 10.1016/j.finmar.2025.100961
Mitsuru Katagiri , Junnosuke Shino , Koji Takahashi
We investigate the effects of the Bank of Japan’s (BOJ’s) exchange-traded fund (ETF) purchase program on equity risk premia. Utilizing the cross-sectional variations in the amount of individual stock that the BOJ has indirectly purchased in the program, the empirical analysis reveals that: (i) the BOJ’s ETF purchases instantaneously support stock prices on purchase, and (ii) the positive effects on stock prices, combined with the countercyclical nature of the BOJ’s purchases, affect the market beta and coskewness of Japanese stocks, leading to an economically significant decline in risk premia.
{"title":"Bank of Japan’s ETF purchase program and equity risk premium: A CAPM interpretation","authors":"Mitsuru Katagiri , Junnosuke Shino , Koji Takahashi","doi":"10.1016/j.finmar.2025.100961","DOIUrl":"10.1016/j.finmar.2025.100961","url":null,"abstract":"<div><div>We investigate the effects of the Bank of Japan’s (BOJ’s) exchange-traded fund (ETF) purchase program on equity risk premia. Utilizing the cross-sectional variations in the amount of individual stock that the BOJ has indirectly purchased in the program, the empirical analysis reveals that: (i) the BOJ’s ETF purchases instantaneously support stock prices on purchase, and (ii) the positive effects on stock prices, combined with the countercyclical nature of the BOJ’s purchases, affect the market beta and coskewness of Japanese stocks, leading to an economically significant decline in risk premia.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"73 ","pages":"Article 100961"},"PeriodicalIF":2.1,"publicationDate":"2025-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143593433","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-03-01DOI: 10.1016/j.finmar.2025.100969
Hao Jiang , Yong Ma , Tianyang Wang
This paper presents an in-depth exploration, both empirically and theoretically, of how institutional attention impacts market microstructure. Our innovative theoretical model incorporates an information processing constraint into the dynamic strategic trading framework. The model predicts a trade-off where increased institutional attention enhances price informativeness at the expense of market liquidity, and suggests that the unmonetized portion of institutional investors’ information advantage significantly influences the effect of public information about an asset’s fundamental value on market microstructure. Additionally, our findings are substantiated through rigorous empirical analysis.
{"title":"Too many irons in the fire: The impact of limited institutional attention on market microstructure and efficiency","authors":"Hao Jiang , Yong Ma , Tianyang Wang","doi":"10.1016/j.finmar.2025.100969","DOIUrl":"10.1016/j.finmar.2025.100969","url":null,"abstract":"<div><div>This paper presents an in-depth exploration, both empirically and theoretically, of how institutional attention impacts market microstructure. Our innovative theoretical model incorporates an information processing constraint into the dynamic strategic trading framework. The model predicts a trade-off where increased institutional attention enhances price informativeness at the expense of market liquidity, and suggests that the unmonetized portion of institutional investors’ information advantage significantly influences the effect of public information about an asset’s fundamental value on market microstructure. Additionally, our findings are substantiated through rigorous empirical analysis.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"73 ","pages":"Article 100969"},"PeriodicalIF":2.1,"publicationDate":"2025-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143593434","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-03-01DOI: 10.1016/j.finmar.2024.100960
Keming Li , Takeshi Nishikawa , Ramesh P. Rao
We document a significant reduction in default risk for the pilot firms relative to non-pilot firms during the Reg SHO period. This effect is more pronounced for firms whose default risk was high prior to the program. We also find that the pilot firms adopt greater accounting conservatism during the program and experience improved bond contracting through reductions in covenant usage in newly issued bonds. Lastly, we find significant improvements in investment efficiency and cash holding value for the pilot firms. Our combined evidence supports the disciplinary role of short selling in the financial markets.
{"title":"Does the threat of short selling discipline management? Evidence from default risk changes around regulation SHO","authors":"Keming Li , Takeshi Nishikawa , Ramesh P. Rao","doi":"10.1016/j.finmar.2024.100960","DOIUrl":"10.1016/j.finmar.2024.100960","url":null,"abstract":"<div><div>We document a significant reduction in default risk for the pilot firms relative to non-pilot firms during the Reg SHO period. This effect is more pronounced for firms whose default risk was high prior to the program. We also find that the pilot firms adopt greater accounting conservatism during the program and experience improved bond contracting through reductions in covenant usage in newly issued bonds. Lastly, we find significant improvements in investment efficiency and cash holding value for the pilot firms. Our combined evidence supports the disciplinary role of short selling in the financial markets.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"73 ","pages":"Article 100960"},"PeriodicalIF":2.1,"publicationDate":"2025-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143593426","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-03-01DOI: 10.1016/j.finmar.2024.100959
Yusuke Tsujimoto
This paper documents coarse pricing by the U.S. Federal Reserve’s counterparty intermediaries in quantitative easing operations. Although the Fed explicitly sets a tick size of 1/256th in its reverse auctions to purchase Treasury securities, offer prices of primary dealers exhibit strong clustering on coarser grids. Top dealers price more finely, and coarse pricing is particularly prevalent when the security characteristics indicate greater difficulty in precise pricing. I argue that this coarse pricing results from information costs associated with increasing pricing precision. The results also point to a novel role of tick size in affecting dealer competition in central bank operations.
{"title":"Coarse pricing in QE auctions","authors":"Yusuke Tsujimoto","doi":"10.1016/j.finmar.2024.100959","DOIUrl":"10.1016/j.finmar.2024.100959","url":null,"abstract":"<div><div>This paper documents coarse pricing by the U.S. Federal Reserve’s counterparty intermediaries in quantitative easing operations. Although the Fed explicitly sets a tick size of 1/256th in its reverse auctions to purchase Treasury securities, offer prices of primary dealers exhibit strong clustering on coarser grids. Top dealers price more finely, and coarse pricing is particularly prevalent when the security characteristics indicate greater difficulty in precise pricing. I argue that this coarse pricing results from information costs associated with increasing pricing precision. The results also point to a novel role of tick size in affecting dealer competition in central bank operations.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"73 ","pages":"Article 100959"},"PeriodicalIF":2.1,"publicationDate":"2025-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143593431","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-01DOI: 10.1016/j.finmar.2024.100949
Yang Guo , Lily Yuanzhi Li , Hongda Zhong
Since investor participation is essential for successful IPOs, we hypothesize that issuers share value gain from IPOs with IPO investors, resulting in IPO underpricing. We test the positive relation between value gain and underpricing from the liquidity angle, as improved liquidity via IPO increases firm value. We find supporting evidence that underpricing is positively related to the expected post-IPO liquidity of the issuer. Using two regulation changes as exogenous shocks to share liquidity before and after an IPO, we show that underpricing is more pronounced with better expected post-IPO liquidity or lower pre-IPO liquidity.
{"title":"Bigger pie, bigger slice: liquidity, value gain, and underpricing in IPOs","authors":"Yang Guo , Lily Yuanzhi Li , Hongda Zhong","doi":"10.1016/j.finmar.2024.100949","DOIUrl":"10.1016/j.finmar.2024.100949","url":null,"abstract":"<div><div>Since investor participation is essential for successful IPOs, we hypothesize that issuers share value gain from IPOs with IPO investors, resulting in IPO underpricing. We test the positive relation between value gain and underpricing from the liquidity angle, as improved liquidity via IPO increases firm value. We find supporting evidence that underpricing is positively related to the expected post-IPO liquidity of the issuer. Using two regulation changes as exogenous shocks to share liquidity before and after an IPO, we show that underpricing is more pronounced with better expected post-IPO liquidity or lower pre-IPO liquidity.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"72 ","pages":"Article 100949"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143336287","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-01DOI: 10.1016/j.finmar.2024.100936
Di Wu , Xiaoke Cheng , Kam C. Chan , Shenghao Gao
Using a reform to relax the exclusion rate of highest bids in the book-building process as an exogenous shock, we find that IPO underpricing decreases, which indicates that excluding a certain percentage of the highest bids impairs IPO pricing efficiency. Further tests reveal that relaxing the mandate increases investors’ valuation of an IPO, thereby decreasing IPO underpricing. Our results also suggest that the relaxation of the stipulation motivates investors to provide more information, as revealed by fewer anchoring bids and reduced herding behavior, as well as higher opinion divergence and better predictive power for investor bids on post-IPO prices.
{"title":"Unintended consequence of high bid price exclusion in IPO auctions: Evidence from China","authors":"Di Wu , Xiaoke Cheng , Kam C. Chan , Shenghao Gao","doi":"10.1016/j.finmar.2024.100936","DOIUrl":"10.1016/j.finmar.2024.100936","url":null,"abstract":"<div><div>Using a reform to relax the exclusion rate of highest bids in the book-building process as an exogenous shock, we find that IPO underpricing decreases, which indicates that excluding a certain percentage of the highest bids impairs IPO pricing efficiency. Further tests reveal that relaxing the mandate increases investors’ valuation of an IPO, thereby decreasing IPO underpricing. Our results also suggest that the relaxation of the stipulation motivates investors to provide more information, as revealed by fewer anchoring bids and reduced herding behavior, as well as higher opinion divergence and better predictive power for investor bids on post-IPO prices.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"72 ","pages":"Article 100936"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143359884","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-01DOI: 10.1016/j.finmar.2024.100947
Xiaodi Zhang
Opinions by media experts and pundits in both traditional media outlets and online venues influence investors. While a published opinion could be more accurate than that of a typical investor, its influence displaces many independent views and has the potential to introduce a shared error. My probabilistic trading model characterizes such influence and demonstrates how the “wisdom of the crowds” effect leads convergence of prices to the fundamental value. I use two corporate events to test the model, and find evidence consistent with the theoretical predictions.
{"title":"The price evolution in financial markets under influence of published opinions","authors":"Xiaodi Zhang","doi":"10.1016/j.finmar.2024.100947","DOIUrl":"10.1016/j.finmar.2024.100947","url":null,"abstract":"<div><div>Opinions by media experts and pundits in both traditional media outlets and online venues influence investors. While a published opinion could be more accurate than that of a typical investor, its influence displaces many independent views and has the potential to introduce a shared error. My probabilistic trading model characterizes such influence and demonstrates how the “wisdom of the crowds” effect leads convergence of prices to the fundamental value. I use two corporate events to test the model, and find evidence consistent with the theoretical predictions.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"72 ","pages":"Article 100947"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143336288","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-01-01DOI: 10.1016/j.finmar.2024.100945
Lixin (Nancy) Su , Sonia Man-Lai Wong , Yuan Xue , Xiaofeng Zhao
We investigate how short-sale constraints influence investor information acquisition. Leveraging the U.S. Securities and Exchange Commission's (SEC's) Regulation SHO pilot program, we find that relaxed short-sale constraints lead to increased public information acquisition by investors. Investors acquire and process valuable information and utilize it to improve their short-selling decisions after the relaxation of short-sale constraints. We obtain similar findings using a quasi-natural experiment in China that lifted short-sale bans, supporting the external validity of our results. Collectively, our evidence demonstrates that reduced trading frictions promote information acquisition and contribute to price discovery.
{"title":"Do short-sale constraints inhibit information acquisition? Evidence from regulation SHO","authors":"Lixin (Nancy) Su , Sonia Man-Lai Wong , Yuan Xue , Xiaofeng Zhao","doi":"10.1016/j.finmar.2024.100945","DOIUrl":"10.1016/j.finmar.2024.100945","url":null,"abstract":"<div><div>We investigate how short-sale constraints influence investor information acquisition. Leveraging the U.S. Securities and Exchange Commission's (SEC's) Regulation SHO pilot program, we find that relaxed short-sale constraints lead to increased public information acquisition by investors. Investors acquire and process valuable information and utilize it to improve their short-selling decisions after the relaxation of short-sale constraints. We obtain similar findings using a quasi-natural experiment in China that lifted short-sale bans, supporting the external validity of our results. Collectively, our evidence demonstrates that reduced trading frictions promote information acquisition and contribute to price discovery.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"72 ","pages":"Article 100945"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143331801","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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