Optimal speculative trade among large traders

A collection of large traders holds heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to engage in speculative trade with respect to market prices. Rather than assuming a particular institution or market for speculative trade, we take a mechanism-design approach by attempting to characterize the mechanism that maximizes the traders’ gains from speculative trade, subject to the incentive constraints that result from the traders’ ability to manipulate market prices. Within a stylized market model, we show that this mechanism affects price volatility without destroying ex-post efficient allocations. We also characterize the implementability of optimal speculative trade when the traders’ prior beliefs are private information. Financial support from the US-Israel Binational Science Foundation, Grant No. 2002298 is gratefully acknowledged.     

An equilibrium model of insider trading in continuous time

We study a Bayesian–Nash equilibrium model of insider trading in continuous time. The supply of the risky asset is assumed to be stochastic. This supply can be interpreted as noise from nonrational traders (noise traders). A rational informed investor (the insider) has private information on the growth rate of the dividend flow rewarded by the risky asset. She is risk averse and maximizes her inter-temporal utility rate over an infinite time-horizon. The market is cleared by a risk neutral market maker who sets the price of the risky asset competitively as the conditional present value of future dividends, given the information supplied by the dividend history and the cumulative order flow. Due to the presence of noise traders, the market demand does not fully reveal the insider’s private information, which slowly becomes incorporated in prices. An interesting result of the paper is that a nonstandard linear filtering procedure gives an a priori form for the equilibrium strategy to be postulated. We show the existence of a stationary linear equilibrium where the insider acts strategically by taking advantage of the camouflage provided by the noise which affects the market maker’s estimates on private information. In this equilibrium, we find that the insider’s returns on the stock are uncorrelated over long periods of time. Finally, we show that the instantaneous variance of the price under asymmetric information lies between the instantaneous variance of the price under complete and incomplete information. The converse inequalities hold true for the unconditional variance of the price.     

The role of usability on stimulating SME’s on line buying intention: an experiment based on a ficticius web site design

The focus of the present paper was to identify the key role of usability in SME’s Website design. A conceptual model has been proposed to show how buying intention antecedents are reinforced in highly usable contexts. The model is founded on the relationships between usability, perceived risk, pleasure attitudes and buying intention. To test our model an “ideal” fictitious Website was designed by two graphic designers for a non existent small clothing company directed at the segment of middle class consumers. Manipulating the usability of this Website, another week navigable Website was created to apply our model in a different context. This experiment prepared based on the results previously obtained through a qualitative study developed through seven focus groups. Results show that Internet user develops positive attitudes when navigating through simple, fast and orderly (usable) SME’s Websites. This leads to greater buying intentions. Also, as perceived risk decreases the Internet user’s buying intention increases significantly.     

Are day traders bias free?—evidence from internet stock message boards

This study addresses the issue whether day traders’ recommendations on stocks are biasfree. We test whether on average day traders’ “Hold” sentiment is skewed and different from a neutral opinion. Posted messages and mature text classifier technology provide a novel approach to analyze the content of these “Hold” sentiment postings among day traders. Findings indicate that the self-disclosed “Hold” sentiment conveys an optimistic opinion and significantly differs from neutral. These results help both investors and researchers to better understand day traders’ psychology and behaviors when they recommend stocks. The paper also provides insight into the construction of future online sentiment indexes based on stock message boards.     

Informational cascades with endogenous prices: The role of risk aversion

In this paper, we show that long run market informational inefficiency and informational cascades can easily happen when trades occur at market clearing prices. We consider a sequential trade model where: (i) the investors’ set of actions is discrete; (ii) dealers and investors differ in risk aversion; (iii) investors’ information is bounded. We show that informational cascade occurs as soon as traders’ beliefs do not differ too sharply. Thus, prices cannot fully incorporate the private information dispersed in the economy.     

Rational expectations equilibrium and the strategic choice of costly information

This paper studies costly information acquisition in one-good production economies when agents acquire private information and prices transmit information. Before asset markets open, agents choose the quality of their private information. After this information stage, agents trade assets in sequentially complete markets taking into account their private information and the information revealed by equilibrium prices (rational expectations equilibrium, (Radner, R., 1979. Rational expectations equilibrium: generic existence and the information revealed by prices, Econometrica 47, 655–678.)). An overall equilibrium in asset and information market is defined as a Nash equilibrium of the information game in which agents’ actions are information choices and their utility payoffs are the ex-ante expected utilities of the corresponding rationale expectations equilibrium. This paper shows that for a generic set of economies parameterized by endowments and productivity shocks, an overall equilibrium in information and asset market (a Nash equilibrium of the induced information game) with costly information acquisition and fully-revealing prices exists. In other words, informational efficiency is in general consistent with costly information acquisition.     

Sovereign debt: Reputation, seizure and reputation

The interaction between a creditor and a sovereign debtor is described as a ‘one-shot’ game with discrete actions—total or no debt-repudiation and seizure of asset holding abroad. Possible Nash equilibria where each player chooses an action as to maximize his expected payoff given his beliefs about the other player’s action and the implications of those actions on the players’ trustworthy reputation are identified. However, if reputation losses rise convexly with the players’ relative hostility, partial repudiation and seizure can be the preferred strategies. The preferred repudiation and seizure rates are analyzed under asymmetric and symmetric information about the state of the world. (JEL classification F34)     

A Bayesian approach to experimental analysis: trading in a laboratory financial market

We employ a Bayesian approach to analyze financial markets experimental data. We estimate a structural model of sequential trading in which trading decisions are classified in five types: private-information based, noise, herd, contrarian and irresolute. Through Monte Carlo simulation, we estimate the posterior distributions of the structural parameters. This technique allows us to compare several non-nested models of trade arrival. We find that the model best fitting the data is that in which a proportion of trades stems from subjects who do not rely only on their private information once the difference between the number of previous buy and sell decisions is at least two. In this model, the majority of trades stem from subjects following their private information. There is also a large proportion of noise trading activity, which is biased towards buying the asset. We observe little herding and contrarianism, as theory suggests. Finally, we observe a significant proportion of (irresolute) subjects who follow their own private information when it agrees with public information, but abstain from trading when it does not.     

On the informed seller problem: optimal information disclosure

We consider a revenue-maximizing seller who, before proposing a mechanism to sell her object(s), observes a vector of signals correlated with buyers’ valuations. Each buyer knows only the signal that the seller observes about him, but not the signals she observes about other buyers. The seller first chooses how to disclose her information and then chooses a revenue-maximizing mechanism. We allow for very general disclosure policies, that can be random, public, private, or any mixture of these possibilities. Through the disclosure of information privately, the seller can create correlation in buyers’ private information, which then consist of valuations plus beliefs. For the standard independent private values model, we show that information revelation is irrelevant: irrespective of the disclosure policy an optimal mechanism for this informed seller generates expected revenue that is equal to her maximal revenue under full information disclosure. For more general allocation environments that allow also for interdependent, for common values, and for multiple items, disclosure policies may matter, and the best the seller can do is to disclose no information at all.     

Efficient trading with restriction

In a classical paper by Cramton, Gibbons, and Klemperer (CGK) (Econometrica 55:615–632, 1987), it is shown that an efficient trading mechanism exists if traders’ initial endowments are not too asymmetric. In this paper, we extend the CGK model by assuming that traders are not allowed to consume more than a given amount (upper bound) of the good. In the CGK model, instead the only restriction is that no agent can consume more than the entire endowment in the economy. By varying this upper bound, we characterize the set of endowments (efficient region) in which efficient trading mechanisms exist in terms of this upper bound. We show that the efficient region becomes smaller when the upper bound decreases. On the other hand, when this upper bound becomes the entire endowment of the economy, we obtain the result in CGK as a special case.     

First-price auctions where one of the bidders’ valuations is common knowledge

We analyze a private and independent valuation first-price auction under the assumption that one of the bidders’ valuations is common knowledge. We show that no pure strategy equilibrium exists and we characterize a mixed strategy equilibrium in which the bidder whose valuation is common knowledge randomizes her bid while the other bidders play pure strategies. In an example with the uniform distribution, we compare the expected profits of seller and buyers in this auction with those in a standard symmetric private valuation model.     

Explaining Income Nonresponse – A Case Study by means of the British Household Panel Study (BHPS)

Many validation studies deal with item nonresponse and measurement error in earning data. In this paper, we explore motives of respondents for the failure to reveal earnings using the British Household Panel Study (BHPS). The BHPS collects socio-economic information of private households in Great Britain. We explain the evolution of income-nonresponse in the BHPS and demonstrate the importance of a discrimination between refusing the income-statement or don’t know. This study is done during my fellowship at the University Essex and is part of the ECASS Project “Respondent Behaviour in Panel Studies”. In particular I would like to thank Heather Laurie, Cheti Nicoletti and Peter Lynn (ISER, Essex) as well as Gert G. Wagner (DIW Berlin and Berlin University of Technology, TUB) for helpful comments. The usual disclaimer applies.     

Bargaining and exclusivity in a borrower–lender relationship

This paper presents a stylized model of a borrower–lender relationship where funds are gradually invested in a project with uncertain return. We show that an exclusive financing relationship arises endogenously in equilibrium due to initial lender’s superior information on the project’s progress. The analysis also identifies a novel distortionary effect of exclusivity and the consequent loss of future rents on the ex-ante choices of the borrower. When she chooses the amount of funds to be initially invested in the project, the borrower chooses to overinvest making the future rent extraction by the initial lender as costly as possible. We would like to thank Alberto Bisin, Andrew Chen, Boyan Jovanovic, Hideo Konishi, David Mauer, Efe Ok, Mike Riordan, Charles A. Wilson, and seminar participants at Society of Economic Design 2002 meetings in New York and Southern Methodist University for helpful comments. The usual disclaimer applies.     

Portfolio Selection under Maximum Minimum Criterion

In this paper, we studied the problem of risky portfolio selection under uncertainty. Different from risk-return analytical methodology, we formulated a model under maximum minimal criterion of uncertain decision-making theory. If the investor had no any distribution information of the returns and (s)he knew the variation scopes of the returns by his/her knowledge of the market information or experts’ evaluations of the alternative risky assets, then we showed that the optimal portfolio strategy of the model under maximal minimal criterion could be obtained by solving linear programming. If the returns were known to be normal distributed, the investor’s optimal portfolio strategy could be obtained by solving a nonlinear programming. The paper also provided an algorithm to solve this programming. At last, the paper compared this model with Markowitz’s mean-varience (M-V) model and Young’s minmax model, and pointed out the distinctions and similarities between our model and the other two. Supported in part by Program for NCET, in part by the Key Project of Chinese Ministry of Education 104053.     

Does the Company Lawyer Have Your Back? A Brief Look at the Need for Personal Private Liability Insurance

There are four traditional uses of private personal liability insurance dating from the 1970s to the present (Hayes 1979; Sommers 2005) which pertain either to individuals or corporations. There is insurance to cover damage to rental cars, umbrella insurance to cover any injury to a guest at one’s home, insurance bought by corporations to cover potential corporate responsibility for actions of company representatives and insurance including misadventures with financial information and morally hazardous behavior as well as corporate required actions which are later deemed to be wrong or inappropriate. Employees need to find out if the employee manual provides for coverage for legal liabilities resulting out of performing job responsibilities. Due to a need to reduce company costs, many companies are reducing or eliminating coverage for employees for many types of actions. Private personal liability insurance gives you the peace of mind to know what you are covered for and for how long. Employee rights versus corporate budgets are at the core of this discussion.     

Equity private placements, liquid assets, and firm value

This paper finds wealth enhancement from equity private placement issuances where liquid assets are provided to slack-poor companies. This result runs counter to the expected Jensen's (1986) excess free-cash-flow problem, where the predominant findings of numerous studies include negative wealth effects from externally financed liquidity enhancements. We also find greater announcement-period returns for smaller firms and firms with better recent performance. Investors appear to view either of these factors, together with the private investor’s willingness to provide additional liquidity, as an asymmetric information release on the firm’s viability and likelihood of improved performance.     

On a noncentral chi-square distribution in the analysis of weapon systems effectiveness

Summary A natural conjugate prior distribution for the parameters involved in the noncentral chi-square leads to many known distributions. The applications of the distributions thus obtained are briefly pointed out in evaluating the ‘kill’ probability in the analysis of weapon systems effectiveness. The ‘kill’ probabilities or the expected coverage are obtained associated with a gamma prior distribution and compared with those obtained byMcnolty. This paper is read in a symposium on Mathematical Sciences held under the auspices of Delhi University, Delhi im January 1966.     

Modeling Educational Quality and Student Loyalty: A Quantitative Approach Based on the Theory of Information Cascades

Customer loyalty is widely accepted as a critical factor in the long-term success of a service organization. This study develops a model of information cascades-based student loyalty (ICSL) by embedding information cascades in the context of educational services with insight from more traditional educational research. In the ICSL model, student loyalty is influenced directly by the perceived quality of teaching services (QTS), the perceived signal of retention (PSR), and the perceived quality of administrative services (QAS), while also being influenced indirectly by QTS, QAS, and perceived others’ retention via the mediation of PSR. This study tests the ICSL model using the structural equation modeling approach, implementing empirical data from a survey done on a large private university in Taiwan. The test results reveal that PSR is significantly influenced by QTS, QAS, and perceived others’ retention. Accordingly, the influence of QAS on student loyalty is insignificant, while the influences of QTS and PSR on student loyalty are conversely significant. Finally, implications are also discussed.     

Incorporating positions into asset pricing models with order-based strategies

The paper addresses the problem of agent-based asset pricing models with order-based strategies that the implied positions of the agents remain indeterminate. To overcome this inconsistency, two easily applicable risk aversion mechanisms are proposed which modify the original actions of a market maker and the speculative agents, respectively. Here the concepts are incorporated into the classical Beja–Goldman model. For the deterministic version of the thus enhanced model a four-dimensional mathematical stability analysis is provided. In a stochastic version it is demonstrated that jointly the mechanisms are indeed able to keep the agents’ positions within bounds, provided the corresponding risk aversion coefficients are neither too low nor too high. A similar result holds for the misalignment of the market price. We wish to thank two anonymous referees for their observations and detailed comments. Financial support from EU STREP ComplexMarkets, contract number 516446, is gratefully acknowledged.     

A link between random coefficient autoregressive models and some agent based models

An agent based model (ABM), where each agent makes decisions by using the sum of two signals, is proposed. The first is related to the fundamental information while the second comes from trader’s idiosyncratic noise. This model entails the switching between two groups called fundamentalist and noise traders. Additionally, if the price impact function is log-linear, then the dynamic of log asset prices belongs to the class of random coefficient autoregressive RCA(p) models, which are known to share important stylized facts of financial prices.