Market for Information and Identity Disclosure in an Experimental Open Limit Order Book

This paper analyses the effects of pre‐trade transparency on market quality in an experimental open limit order book preceded by a market for information. The design of the trading game is akin to the system in use in an increasing number of financial markets. We find that the disclosure of traders' identities reduces the incentive to acquire information, liquidity and volatility. We also show that a positive relation exists between the proportion of traders buying information and liquidity. The results are consistent with a standard model of price formation where the number of informed traders is endogenous .     

Compensation schemes,liquidity provision,and asset prices: an experimental analysis

In an experimental setting in which investors can entrust their money to traders, we investigate how compensation schemes affect liquidity provision and asset prices, two outcomes that are important for financial stability. Compensation schemes can drive a wedge between how investors and traders value the asset. Limited liability makes traders value the asset more than investors. To limit losses, investors should thus restrict liquidity provision to force traders to trade at a lower price. By contrast, bonus caps make traders value the asset less than investors. This should encourage liquidity provision and increase prices. In contrast to these predictions, we find that under limited liability investors increase liquidity provision and asset price bubbles are larger. Bonus caps have no clear effect on liquidity provision and they fail to tame bubbles. Overall, giving traders skin in the game fosters financial stability.     

Market Dynamics,Programmed Traders and Futures Markets: Beginning the Laboratory Search for a Smoking Gun

Recent events have caused a re-examination of the role of programmed traders and futures markets in generating destabilizing price movements. Laboratory experiments provide an ideal environment to isolate their effects on behaviour. In a new series of experiments we find that program traders and futures markets can be crucial for ensuring the informational efficiency of the spot market, even when the former are active participants in bubbles and crashes     

异质信念、投机均衡与农产品期货定价*

农产品期货市场套利并不充分,交易者也不是完全理性的。本文假设农产品期货市场有限套利、交易者异质信念并遵循“经验法则”预期,构建了农产品期货投机均衡定价模型,并认为集中竞价规则下产生的农产品期货价格是由交易者的预期决定的;前期期货价格水平、现货价格和前期期货价格的变动趋势、不同类型交易者的比例结构及其预期模式共同影响农产品期货价格的形成与波动;基本分析法交易者占主导地位的农产品期货市场具有更高的套期保值与价格发现效率。针对中国七种主要农产品期货的实证结果显示,农产品期货投机均衡定价模型对解释中国农产品期货价格的形成与波动是有效的。这意味着在期货行情系统中实时披露现货价格信息,培育和引导交易者运用基本分析法预测期货价格走势,有助于提升农产品期货市场的效率。     

Testing the effect of technical analysis on market quality and order book dynamics

We find empirical support for the theoretical finding in agent-based models of limit order book markets that the effect of technical trading on market quality is not positive. When signals occur, technical traders lower liquidity as proxied by the relative spread, the effective spread, the realized spread, the dispersion and the slope in the order book. Technical trading is also found to be accompanied by rising volatility. There is overall strong empirical support against the hypothesis that technical trading has no effect on order book dynamics.     

Trading platform,market volatility and pricing efficiency in the floor-traded and E-mini index futures markets

This study examines the pricing efficiency of E-mini and floor-traded index futures under electronic versus open-outcry trading platforms. By using OLS and quantile regressions to control for changes in market characteristics, we find that pricing errors are smaller in the E-mini markets than the floor-traded markets, thereby confirming that electronic trading has special attractions for arbitrageurs and informed traders. However, during periods of higher volatility, the advantages of speedier execution, anonymity and information efficiency may be offset by arbitrage risks; as a result, larger pricing errors are observed in the E-mini markets. We provide new evidence confirming the important roles in pricing efficiency played by both traditional open-outcry systems and electronic trading systems.     

Strategic noise traders and liquidity pressure with a physically deliverable futures contract

Do physically deliverable futures contracts induce liquidity pressure in the underlying spot market? The answer is believed to be no since the asset is delivered sometimes after the expiration of the contract so that the futures trader's payoff does not clearly depend on the price of the underlying stock at expiration. We construct a rational expectations equilibrium model in which a strategic uninformed trader induces liquidity pressure in the underlying spot market at the expiration of a physically deliverable futures contract. Liquidity pressure is the result of a pure informational advantage: if it is known that futures traders hedge their position in the spot market then a strategic trader with no information about the fundamental value of the underlying has an incentive to create noise in the futures market in order to gain information on the composition of the spot order flow at future auctions. We show that informed traders benefit from this form of strategic noise and that the efficiency of the prices remains unaffected.     

Liquidity commonality in order-driven trading: evidence from the Athens Stock Exchange

We examine the presence of liquidity commonality in the order-driven Athens Stock Exchange (ASE). Unlike the majority of liquidity commonality studies that focus on the bid–ask spread, our analysis extends deeper in the Limit Order Book, providing insight on the price impact of both small and large trades. We utilize a 6-month FTSE/ATHEX-20 intraday data set to estimate the liquidity factor model of Chordia et al. (2000). To this end, we conduct single-equation analysis as well as panel data analysis with the use of two-way clustered errors, correcting for simultaneous firm and time correlations. Moreover, we apply standard principal component analysis on stock liquidities to extract the marketwide liquidity component. We find that liquidity commonality is low at the bid–ask spread, whereas it increases deeper in the book; consequently, large traders face liquidity risks associated with both individual stock and marketwide illiquidity. Moreover, our empirical evidence hints that liquidity commonality is asynchronous, suggesting that the ASE trading process includes various levels of information speed. Our analysis contributes to the understanding of liquidity commonality in order-driven trading, especially in emerging markets like the ASE where trading activity is limited and information speed is low.     

Price efficiency and trading behavior in limit order markets with competing insiders

We study price efficiency and trading behavior in laboratory limit order markets with asymmetrically informed traders. Markets differ in the number of insiders present and in the subset of traders who receive information about the number of insiders present. We observe that price efficiency (i) is the higher the higher the number of insiders in the market but (ii) is unaffected by changes in the subset of traders who know about the number of insiders present. (iii) Independent of the number of insiders, price efficiency increases gradually over time. (iv) The insiders’ information is reflected in prices via limit (market) orders if the asset’s value is inside (outside) the bid-ask spread. (v) In situations where limit and market orders yield positive profits, insiders clearly prefer market orders, indicating a strong desire for immediate transactions.     

Pricing accuracy,liquidity and trader behavior with closing price manipulation

We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants’ behavior, leading to reduced liquidity. We find evidence that ordinary traders attempt to profitably counteract manipulation. This study provides examples of the strategies employed by manipulators, illustrates how these strategies change in the presence of detection penalties and assesses the ability of market participants to identify manipulation.     

The “inflow-effect”—Trader inflow and price efficiency

We investigate the impact of cash and trader inflow on price efficiency in multi-period experimental asset markets. Implementing eight treatments with 672 subjects, we find that (i) the joint inflow of cash and traders triggers strong overvaluation and massive price run-ups (inflow-effect). Remarkably, the effect occurs in almost all of the 30 markets with joint cash and trader inflow and is very robust. The effect even prevails in markets with complete and symmetric fundamental information. We further show that (ii) in treatments with the joint inflow of cash and traders, prices crash to fundamentals towards maturity of the asset. The analysis of traders׳ beliefs reveals that (iii) despite fundamental values staying constant, beliefs about fundamentals co-move with upwardly trending prices. Finally, we report a speculative motive only among the optimists in treatments where we observe the inflow-effect.     

Market manipulation with sentiment traders

This article offers a new perspective for traders’ sentiment by bridging the relationship between feedback effect and market manipulation. Allowing access to information regarding manipulated orders confuses sentiment traders, leading to an overestimation of the true asset value which actually remains the same. We find that sentiment factor has a nonmonotonic impact on the responsiveness to order information and price informativeness. Furthermore, it is shown that informed traders behave like a contrarian, and can use order information to reassess the price, which results in the multiplicity of equilibria.     

Selection in asset markets: the good, the bad, and the unknown

In this paper, we use a series of simple examples to illustrate how wealth-driven selection works in a market for Arrow securities. Our analysis delivers both a good and a bad message. The good message is that, when traders invest constant fractions of their wealth in each asset and have equal consumption rates, markets are informationally efficient: the best informed agent is rewarded and asset prices eventually reflect this information. However, and this is the bad message, when asset demands are not constant fractions of wealth but dependent upon prices, markets might behave sub-optimally. In this case, asymptotic prices depend on preferences and beliefs of the whole ecology of traders and do not, in general, reflect the best available information. We show that the key difference between the two cases lies in the local, i.e. price dependent, versus global nature of wealth-driven selection.     

Financial Bubbles: Excess Cash,Momentum, and Incomplete Information

We report on a large number of laboratory market experiments demonstrating that a market bubble can be reduced under the following conditions: 1) a low initial liquidity level, i.e., less total cash than value of total shares, 2) deferred dividends, and 3) a bid-ask book that is open to traders. Conversely, a large bubble arises when the opposite conditions exist. The first part of the article is comprised of twenty-five experiments with varying levels of total cash endowment per share (liquidity level), payment or deferral of dividends and an open or closed bid-ask book. We find that the liquidity level has a very strong influence on the mean and maximum prices during an experiment (P < 1/10,000). These results suggest that within the framework of the classical bubble experiments (dividends distributed after each period and closed book), each dollar per share of additional cash results in a maximum price that is $1 per share higher. There is also limited statistical support for the theory that deferred dividends (which also lower the cash per share during much of the experiment) and an open book lead to a reduced bubble. The three factors taken together show a striking difference in the median magnitude of the bubble ($7.30 versus $0.22 for the maximum deviation from fundamental value). Another set of twelve experiments features a single dividend at the end of fifteen trading periods and establishes a 0.8 correlation between price and liquidity during the early periods of the experiments. As a result, calibration of prices and evolution toward equilibrium price as a function of liquidity are possible.     

Informed trade,uninformed trade and stock price delay

The probability of informed trading (PIN), a measure of information-based trading risk, has been broadly applied to empirical studies on asset pricing. However, it is still controversial whether PIN measures exclusively the risk of firm-specific private information or it also captures the private interpretation of market wide public information. This article examines the relevance of PIN to the delayed response of stock prices to market-wide information. We find that PIN significantly explains individual stock price delay even controlling for size, liquidity and risk, and low-PIN stock prices adjust to market information more rapidly not only because of a notably high level of informed trading but also an even much higher level of uninformed trading. Our findings support the notion that PIN also captures the private skilled interpretation of public common factor information by sophisticated investors, and provide new empirical evidence on how information-based trading affects the speed at which stock prices adjust to information.     

Model uncertainty and liquidity

Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets like the market for mortgage backed securities or credit derivatives. Moreover, the observed behavior of traders and institutions that places a large emphasis on “worst-case scenarios” through the use of “stress testing” and “Value-at-Risk” seems different than Savage expected utility would suggest. In this paper, we capture model-uncertainty using an Epstein and Wang [Epstein, L.G., Wang, T., 1994. Intertemporal asset pricing under Knightian uncertainty. Econometrica 62, 283–322] uncertainty-averse utility function with an ambiguous underlying asset-returns distribution. To explore the connection of uncertainty with liquidity, we specify a simple market where a monopolist financial intermediary makes a market for a propriety derivative security. The market-maker chooses bid and ask prices for the derivative, then, conditional on trade in this market, chooses an optimal portfolio and consumption. We explore how uncertainty can increase the bid–ask spread and, hence, reduces liquidity. Our infinite-horizon example produces short, dramatic decreases in liquidity even though the underlying environment is stationary. We show how these liquidity crises are closely linked to the uncertainty aversion effect on the optimal portfolio. Effectively, the uncertainty aversion can, at times, limit the ability of the market-maker to hedge a position and thus reduces the desirability of trade, and hence, liquidity.     

金融资产定价异常现象研究综述及其对新资产定价理论的启示

论文首先通过建立模型分析了在不同知情消费者比例下价格离散的结构形式,理论剖析了在搜索成本明显下降的电子商务市场,价格离散仍然持续存在的客观原因;进而运用在北京地区的93家电子商务零售网站、9大类535款商品、6313个价格样本数据检验了中国电子商务市场价格离散的情况,研究了其价格离散成因。结果表明在电子商务市场上,价格离散将持续存在,知情消费者比例与价格离散指标之间并不是一个单调关系;零售商特征,尤其是市场特征影响价格离散,各类零售商的定价依据不同。     

Exchange Rates,Expectations, and Monetary Policy: a NOEM Perspective*

We use a dynamic general‐equilibrium optimizing two‐country model to analyze how the formation of exchange rate expectations shapes the effects of a monetary policy shock in an open economy. We also provide empirical evidence on how traders in foreign exchange markets form exchange rate expectations. Our model implies that the short‐run output effect of a permanent monetary policy shock diminishes if “technical traders” form the type of regressive exchange rate expectations we find in our empirical analysis. If the influence of technical traders is strong enough, a permanent expansionary monetary policy shock can result in a temporary decline of the output in the country in which it takes place. The output effect of a temporary monetary policy shock is magnified when technical traders form regressive exchange rate expectations.     

流动性与资产定价:基于我国股市资产换手率与预期收益的实证研究

流动性与资产定价是目前金融研究的热点之一 (O’Hara,2 0 0 3 )。本文通过检验交易频率零假设和交易成本备择假设 ,深入分析我国股市流动性与资产定价的理论与经验关系 ,发现 :我国股市存在显著的流动性溢价 ,换手率低、交易成本高且流动性小的资产具有较高的预期收益 ;产生流动性溢价的原因是交易成本而不是交易频率 ;与国外股市相似 ,小企业收益率高于大企业 ,价值股收益率高于成长股。因此 ,我国股市并非令人无法捉摸 ,流动性、规模和价值效应都是资产定价的因素     

Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread

This note investigates the effects of introducing a transaction tax on depth and bid-ask spread using a static model where a competitive market maker faces informed and liquidity traders. When the degree of information asymmetry is low, an increase in the transaction tax can result into a smaller rise in the selling price and the depth may even increase in some cases. When information asymmetry is high, the dealer could increase the selling price more than the tax and sometimes lowers the depth. This can result in a market shutdown if the liquidity trader is driven out of the market. We thank Vincent Reinhart and Walter Fisher for helpful discussions. Special thanks are also due to an anonymous referee and the editor C.D. Aliprantis for insightful comments and suggestions which have helped us to improve the paper substantially. The usual disclaimer applies.