Prices, liquidity, and the information content of trades

We investigate the effect of asymmetric information on pricesand liquidity by analyzing trades, quotes, spreads, and depths.Information content should increase with trade size and theinformation asymmetry of the trading period. Results show thatprice and liquidity effects are significantly associated withinformation content as measured by both trade size and timingrelative to information events. Results are stronger for purchasesthan sales. Quoted prices are better measures of informationeffects than transaction prices, because they control for bid-askbounce. Finally, trades that a priori contain no informationhave no impact on prices and liquidity, despite their largesize.     

Herding behaviour in the Australian loan market and its impact on bank loan quality

We examine the effect of herding behaviour on the credit quality of bank loans in Australia. We find that bank herding varies with different types of loans. It tends to be more prevalent in owner‐occupied housing loans and credit cards than other types of loans. During the global financial crisis period, herding in owner‐occupied housing loans was most pronounced due to the flight‐to‐quality phenomenon in the housing sector. Furthermore, we find that the big four banks tend to herd more than smaller and regional banks. Bank herding behaviour is countercyclical, as it is negatively related to real GDP growth and the cost of funding but is positively related to market risk. Regulatory capital requirements may also encourage herding as banks are required to hold less risk‐weighted capital for residential loans. Most importantly, bank herding is related to higher impaired assets and therefore lower loan quality. Our findings may have implications for policymakers and bank regulators.     

Forward exchange market unbiasedness: the case of the Australian dollar since 1984

This paper implements a robust statistical approach to regression with non-stationary time series. The methods were recently developed in other work and are briefly exposited here. They allow us to perform regressions in levels with non-stationary time series data, they accommodate data distributions with heavy tails and they permit serial dependence and temporal heterogeneity of unknown form in the equation errors. With these features the methods are well suited to applications with frequently sampled exchange rate data, which generally display all of these empirical characteristics. Our application here is to daily data on spot and forward exchange rates between the Australian and US dollars over the period 1984–1991, following the deregulation of the Australian foreign exchange market. We find big differences between the robust and the non-robust regression outcomes and in the associated statistical tests of the hypothesis that the forward rate is an unbiased predictor of the future spot rate. The robust tests reject the unbiasedness hypothesis but still give the forward rate an important role as a predictor of the future spot rate.     

Pricing and information content of block trades on the Shanghai Stock Exchange

We study the pricing mechanisms and information content of block trades on the Shanghai Stock Exchange (SSE) for the six year period from 2003 to 2009.There is an average of about 4% block discount, which is large in magnitude and statistically significant, reflecting compensation for locating counterparties and the cost of negotiating terms. We also examine permanent price impacts of the trades and find that discount block trades (DBTs) have significant negative permanent price impacts for various periods extended up to 60 trading days after the block trades. Conversely, premium block trades (PBTs) have small and statistically insignificant negative permanent price impacts, suggesting that buyers do not possess valuable private information. Finally, we classify the trades into buys and sells using a set of stricter rules and note similar results to those of DBTs and PBTs. Of additional note, block sells on stocks with expirations of restricted shares seem to have significant information content. As these trades are more likely to be originated from insiders, our results suggest that they strategically time the sale of these shares to maximize gains.     

Herding and information based trading

This paper expands on the existing literature on information asymmetry by testing if herding exists. We test herd behavior in a transparent and order-driven market using intraday data. We propose (1) a modification in the herding measure, (2) that investors tend to herd more based on fundamental analysis relative to technical analysis, and (3) that informational asymmetry can be identified by applying the informational cascade model to herding. In general, our analyses agree with the existing literature that herding tends to be more prevalent with small stocks and in economic downturns and that investors are more likely to herd when selling rather than buying stocks. Most importantly, our results reveal the existence of informational cascades, which highlights the crucial role played by so-called fashion leaders, especially when more informed investors trade with “noise”.     

Informed and uninformed trading on the Australian dollar

Using a high-frequency data set of the spot Australian/US dollar, this study examines the distribution of quotes, spreads, and returns across the trading day. By identifying the direction of trade and the subsequent quote returns from contributing banks, the segmented nature of the market into market-makers and informed and uninformed traders is investigated. The results suggest that the economic gain possible from private information is maximised over 2 to 5 quotes and is rapidly eroded by 20 quotes (about 2 min later during busy trading times) as other new information enters the market. Also, the analysis is revealing of discontinuities in trading and the volatility of pricing across the trading day.     

The mandatory disclosure of trades and market liquidity

Financial market regulations require various 'insiders' to disclosetheir trades after the trades are made. We show that such mandatorydisclosure rules can increase insiders' expected trading profits.This is because disclosure leads to profitable trading opportunitiesfor insiders even if they possess no private information onthe asset's value. We also show that insiders will generallynot voluntarily disclose their trades, so for disclosure tobe forthcoming, it must be mandatory. Key to the analysis isthat the market cannot observe whether an insider is tradingon private information regarding asset value of is trading forpersonal portfolio reasons.     

Mutual fund trades and the value of contradictory private information

We investigate the performance of mutual funds that trade using private information. These funds are uniquely identified from a set of 2730 funds with 44,315 fund-periods between 1994 and 2005. We compare the alignment of fund trades with brokers’ recommendations, which we regard as “public information” in the universe of informed and uninformed mutual funds. Funds that systematically trade counter to the public information form a homogenous subset of the privately informed funds. By using private information that contradicts the public information, these funds exhibit a superior average performance. After we control for serial correlation in fund returns, we assess this advantage as being an economically significant 1.7% per annum. We also show empirically that smaller funds are better able to capture the benefit of private information.     

Large option trades, market makers, and limit orders

This article focuses on the difference between market makersand limit orders in their role as suppliers of liquidity. Forboth sources of liquidity I analyze the price behavior of stocksand options around large option trades and I estimate the premiumpaid by the initiator of the large trade. My findings suggestthat limit orders for options are 'picked off' after adversechanges in the underlying stock price. Furthermore, I find thatfor these transactions there is a permanent change in quotationsin the direction of the transaction. After transactions wheremarket makers supply liquidity, quotes tend to return to theirpretrade level.     

Accounting and non-accounting based information in the market for debt: Evidence from Australian private debt contracts

This paper examines accounting and non-accounting based restrictive covenants in Australian private debt agreements. With respect to the former, our findings differ from previous research on public debt. We find more varied definitions of constraints and their specified tightness in private debt contracts than in public debt contracts. Further, limits on interest cover are found to be continuing constraints and not 'once-off' limits. The paper reports frequent use of more specific or 'tailored' accounting based constraints and the frequent inclusion of off-balance sheet numbers in the measurement rules specified.
The paper also provides the first Australian evidence on the use of non-accounting based constraints. These are pervasive and cover a wide range of corporate activity. While largely consistent with previous research the paper also reports evidence of restrictions previously argued to be sub-optimal and hence, unlikely to be observed. Specifically, there are frequent restrictions on firms' production and investment policies.     

Who knows what when? The information content of pre-IPO market prices

To resolve the IPO underpricing puzzle it is essential to analyze who knows what when during the issuing process. In Germany, broker-dealers make a market in IPOs that starts as soon as the offer range is published. We examine these pre-IPO prices and find that they are highly informative. They are closer to the first price subsequently established on the exchange than both the midpoint of the offer range and the offer price. The pre-IPO prices explain a large part of the underpricing left unexplained by other variables. The results imply that information asymmetries are much lower than the observed variance of underpricing suggests. They cast doubt on the informational role of bookbuilding and the relevance of the winner's curse problem.     

Intervention in the mark/dollar market: the authorities' reaction function

This paper investigates the intervention behavior of the Deutsche Bundesbank in the dollar/DM market over the period 1974 to 1981. An intervention reaction model is developed which stresses the conditioning role of perceived exchange-rate uncertainty. The most important findings from non-linear estimates are: (i) an increase in perceived exchange rate risk shifts the Bundesbank's trade-off between money and exchange-rate control in favor of the former aim, probably due to risk aversion of the managers of the foreign department; (ii) the Bank tries to counter exchange speculation by compressing the expected risk premium; and (iii) the Bank does not completely sterilize.     

Trade and information in the corporate bond market

This paper examines the impact of shifting liquidity and institutional trading in the corporate bond market on inferences regarding informational efficiency. We find that when institutional trade dominance and other bond trading features are accounted for, stock leads evidenced in earlier studies surprisingly disappear. Short windows after firm-specific news releases are examined, and bond trading advantages are shown to be pronounced particularly when equity market liquidity is low (during after-market hours). Cross-sectionally, the effect of credit risk and other firm/bond level characteristics are determined. Finally, ‘top bonds’ are identified, and their common ex ante identifiable characteristics are determined.     

Insider information and the efficiency of the acquisitions' market

This paper investigates the implications of insider information on the bid premiums paid by acquiring companies, and measures the distribution of gains from merging to each party. The results of the study suggest that acquirors obtained abnormal returns on shares purchased prior to a bid.     

Modelling exchange-traded barrier options traded in the Australian options market

Barrier options traded in the Australian market vary considerably in terms of the extent to which the barrier is monitored and in terms of the location of the barrier level relative to the exercise price. This paper examines the impact of these differences on prices and also on deltas and gammas. We find that it is not possible to generalize results concerning hedge parameter values to all barrier options. We find that options examined by Easton et al. (2004) do not display discontinuity of deltas at the barrier levels and that their apparent overpricing cannot be attributed to hedging difficulties.     

On the theory of market information efficiency

This paper discusses the concept of market information efficiency and demonstrates the following: As the number of traders who participate in the market becomes large, the variations in the price of a security caused by the variations in traders' beliefs make the market price vary as if traders all knew the ‘true’ distribution of returns on the security. The empirical implications of the analysis are also explored.     

An alternative measure of the “world market portfolio”: Determinants, efficiency, and information content

The world market portfolio plays an important role in international asset pricing, but is unobservable in practice. We first propose a framework for constructing a market proxy that corresponds to the “market portfolio” of financial theory. We then construct this proxy, analyze its determinants and test its efficiency and explanatory power over the period 1975-2007 with respect to the return generating processes of a broad asset universe. We show that its major determinants are traded assets and that it is not efficient. However, it is significant for explaining individual asset returns over an asset universe that includes stocks, bonds, money markets and commodities. The explanatory information is incremental to what is available in traded asset prices and the significance of this information is robust with respect to diversified portfolios generated by factor analysis and to characteristic-sorted portfolios as well as to various model specifications, including the single-index model, the Fama-French (1992) three factor model for stocks, and various specifications of multi-index models hedged and unhedged for foreign currency risk.     

Public information releases, private information arrival and volatility in the foreign exchange market

This paper estimates the impact of market activity and news on the volatility of returns in the exchange market for Japanese Yen and US dollars. We examine the effects of news on volatility before, during and after news arrival, using three categories of news. Market activity is proxied by quote arrival, separated into a predictable seasonal component and an unexpected component. Results indicate that both components of market activity, as well as news releases, affect volatility levels. We conclude that both private information and news effects are important determinants of exchange rate volatility. Our finding that unexpected quote arrival positively impacts foreign exchange rate volatility is consistent with the interpretation that unexpected quote arrival serves as a measure of informed trading. Corroborating this interpretation is regression analysis, which indicates that spreads increase in the surprise component of the quote arrival rate, but not in the expected component. The estimated impact of a unit increase in unexpected quote arrival and the range of values observed for this variable imply an important volatility conditioning role for informed trading.     

Institutional Herding in the ADR Market

This study examines institutional herding in the ADR market between 1985 and 1998. We find a significant positive relation between changes in institutional ownership and ADR returns over the same period. The positive relation persists after we control for the momentum effect in the US stock markets. We also find that in the ADR market, past winners (losers) in the herding period continue to be the winners (losers) in the post-herding period. The lack of a returns reversal suggests institutional herding is related to momentum trading. However, the positive relation between institutional ownership changes and ADR returns remains after controlling for momentum trading in the ADR market. Our results also rule out that positive feedback trading is related to institutional herding in the ADR market.     

Stock and option market divergence in the presence of noisy information

We examine market behavior of the stock and option markets upon the arrival of noisy information in the form of CNBC’s Mad Money recommendations. If stock and option markets are not equally efficient, they should respond differently to noisy information, with the less efficient market more susceptible to noise. We find that the stock market is less efficient than the option market. The abnormal difference between option-implied and actual stock returns is negative and significant upon exposure to noisy information. This difference may yield an economically significant monthly trading profit of up to 5%. We conclude that the stock market is more susceptible to noisy information than the option market and is therefore less efficient.