Tobin tax and market depth

This paper investigates—on the basis of the Cont–Bouchaud model—whether a Tobin tax can stabilize foreign exchange markets. Compared to earlier multi-agent studies, this paper explicitly recognizes that a transaction tax-induced reduction in market depth may increase the price responsiveness of a given order. We find that the imposition of a transaction tax may still achieve a triple dividend: (1) exchange rate fluctuations decrease, (2) currencies are less mispriced and (3) central authorities raise substantial tax revenues. However, if the price impact function is too sensitive with respect to market depth, stabilization may turn into destabilization.     

A financial CCAPM and economic inequalities

This paper considers a wealth heterogeneous multi-agent (MA) financial pricing CCAPM model. It is based on the following observations: (a) A distinction between what agents are willing to pay for consumption and what they actually pay. The former is a function of a number of factors including the agent’s wealth and risk preferences and the latter is a function of all other agents’ aggregate consumption or equivalently, their wealth committed to consumption. (b) Unlike traditional pricing models that define a representative agent underlying the pricing model, this paper assumes that each agent is in fact ‘Cournot-gaming’ a market defined by all other agents. This results in a decomposition of an n-agents game into n games of two agents, one a specific agent and the other a synthetic agent (a proxy for all other agents), on the basis of which an equilibrium consumption price solution is defined. The paper’s essential results are twofold. First, a Martingale pricing model is defined for each individual agent expressing the consumer willingness to pay (his utility price) and the market price—the price that all agents pay for consumption. In this sense, price is unique defined by each agent’s ‘Cournot game’ Agents’ consumption are then adjusted accordingly to meet the market price. Second, the pricing model defined is shown to account for agents wealth distribution pointing out that all agents valuations are a function of their and others’ wealth, the information they have about each other and other factors which are discussed in the text. When an agent has no wealth or cannot affect the market price of consumption, then this pricing model is reduced to the standard CCAPM model while any agent with an appreciable wealth compared to other agents, is shown to value returns (and thus future consumption) less than wealth-poor agents. As a result, this paper will argue that even in a financial market with an infinite number of agents, if there are some agents that are large enough to affect the market price by their decisions, such agents have an arbitrage advantage over the poorer agents. The financial CCAPM MA pricing model has a number of implications, some of which are considered in this paper. Finally, some simple examples are considered to highlight the applicability of this paper to specific financial issues.     

Cointegration and causality between macroeconomic variables and stock market returns

The purpose of this study is to investigate whether current economic activities in Korea can explain stock market returns by using a cointegration test and a Granger causality test from a vector error correction model. This study finds that the Korean stock market reflects macroeconomic variables on stock price indices. The cointegration test and the vector error correction model illustrate that stock price indices are cointegrated with a set of macroeconomic variables—that is, the production index, exchange rate, trade balance, and money supply—which provides a direct long-run equilibrium relation with each stock price index. However, the stock price indices are not a leading indicator for economic variables, which is inconsistent with the previous findings that the stock market rationally signals changes in real activities.     

Difference Systems in Financial Futures Markets

Many financial futures markets allow substitutions for the par grade of security at delivery. Substitutes are deliverable at premiums or discounts—“differences” in commodities parlance—to the futures price. The rule that establishes these differences is called a difference system. This paper characterizes financial futures market equilibrium with yield-based difference systems and investigates particular systems in use. The major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security.     

A liquidity-based model for asset price bubbles

We provide a new liquidity-based model for financial asset price bubbles that explains bubble formation and bubble bursting. The martingale approach to modeling price bubbles assumes that the asset's market price process is exogenous and the fundamental price, the expected future cash flows under a martingale measure, is endogenous. In contrast, we define the asset's fundamental price process exogenously and asset price bubbles are endogenously determined by market trading activity. This enables us to generate a model that explains both bubble formation and bubble bursting. In our model, the quantity impact of trading activity on the fundamental price process—liquidity risk—is what generates price bubbles. We study the conditions under which asset price bubbles are consistent with no arbitrage opportunities and we relate our definition of the fundamental price process to the classical definition.     

The Beta Dilemma in Emerging Markets

In principle, emerging markets analysts employ the same analytical framework when estimating the value of businesses as their counterparts in developed economies: they forecast future cash flows and discount those to the present with appropriate costs of capital that are estimated using the Capital Asset Pricing Model (CAPM) framework. But in practice, emerging market analysts have a more complicated job because the task of estimating costs of equity in emerging markets is more difficult. Whereas developed economies have an abundance of historical data on overall stock market movements, industry share price behavior, and many individual share price histories, emerging market economies often do not. There may be no comparable local firms that are publicly traded—or if there are, their CAPM betas may be unreliable. And if analysts instead use the beta of a U.S. competitor as a surrogate for the emerging market beta, they face the question of whether domestic betas are equivalent across borders. As a consequence, appraisers of emerging market companies confront a “beta dilemma.” Part of this is a data problem stemming from shorter share price histories in emerging markets and the absence of publicly traded companies in some industries. In such cases, analysts may be inclined to use industry betas calculated with U.S. share prices as a substitute. But this creates an equivalence problem—the possibility, as confirmed by the author's research, that domestic U.S. and emerging market betas are not statistically equivalent for most industries. The author proposes a solution to this problem that involves grouping emerging markets into a single, distinctive asset class that allows for reliable calculations of industry betas. He also suggests ways of testing emerging market industry betas to determine whether they are statistically comparable.     

Options Arbitrage in Imperfect Markets

Option valuation models are based on an arbitrage strategy—hedging the option against the underlying asset and rebalancing continuously until expiration—that is only possible in a frictionless market. This paper simulates the impact of market imperfections and other problems with the “standard” arbitrage trade, including uncertain volatility, transactions costs, indivisibilities, and rebalancing only at discrete intervals. We find that, in an actual market such as that for stock index options, the standard arbitrage is exposed to such large risk and transactions costs that it can only establish very wide bounds on equilibrium options prices. This has important implications for price determination in options markets, as well as for testing of valuation models.     

我国黄金期货市场功能发挥的实证研究

本文运用协整检验、Granger因果检验、Garbade-Silber模型、误差修正模型等对2008年1月9日到2008年11月14日上海期货交易所黄金期货合约的价格发现功能和套期保值功能进行研究,结果表明:黄金现货价格对期货价格存在单向引导关系,在价格发现功能中,黄金现货价格起着决定性的作用,期货市场价格发现功能相对较弱。     

Interbank relationship lending revisited: Are the funds available at a similar price?

Under the market discipline hypothesis, monitoring by interbank lenders may induce changes in either the price or availability of new interbank funds to borrower banks. However, the presence of interbank relationship lending has been evaluated based on the availability of funds only—disregarding their price. We revisit relationship lending in unsecured interbank lending markets by simultaneously evaluating the availability and price of funds. We calculate the survival ratio of networks containing the price of daily interbank lending in Colombia from 2014 to 2020. Under this framework, an interbank relation survives from one day to the next if the funds are available at a price that does not increase too much; that is, either a halt in interbank funding or a sizeable increase in the price of interbank funding mark a break in the relation between two banks. We find that about 38 percent of relations in the Colombian unsecured interbank lending market survive from one day to the next. Therefore, from a comprehensive market discipline perspective, we find evidence of interbank relationship lending in Colombia.     

Fundamentals or Noise? Evidence from the Professional Basketball Betting Market

This paper uses the betting market for professional basketball games to address the issue of unexplained asset price volatility. A pricing model is presented which identifies two components in point spreads for professional basketball games. Both components—the market's estimate of relative team abilities and an idiosyncratic factor—are essentially unobserved, but can be identified ex post. The structure of this market enables tests of competing hypotheses about point spread variation. The tests reject the hypothesis that variation in the two components represents irrelevant noise. The hypothesis that unobserved fundamentals account for this variation is consistent with the data.     

Mispricing and lasting arbitrage between parallel markets in the Czech Republic

If co-existing parallel markets are efficient, then arbitrage will maintain a correct pricing relationship. A related question is whether two parallel emerging markets offering more or less the same securities but using different institutional designs, can behave as a single, fully integrated market. In this paper an explicit model of price convergence (with transaction costs) is introduced, in which price differences are studied using levels of arbitrage activity. For the empirical analysis two parallel markets in the Czech Republic are used — the Prague Stock Exchange (PSE) and the RMS (over-the-counter system). In particular, the degree of arbitrage activity is studied for different segments of the PSE and the evolution of arbitrage in the early history of these emerging markets. The empirical results provide evidence of market linkage for actively traded stocks. A significant relationship is found between the segment of the market to which a given firm belongs and the estimated level of arbitrage trading. Moreover, the level of arbitrage activity increases over time for all market segments, and as the markets mature, the differences among the segments gradually disappear.     

The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study

A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid-ask spreads. In this paper, these variables are observed in a controlled setting—a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival—whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong-form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi-strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger-form market models predict equilibrium prices better than weaker-form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid-ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.     

去伪存真:油价趋势与股票市场——来自“一带一路”35国的经验证据

油价波动深刻影响全球经济,严重时会造成全球股市动荡,甚至引发系统性金融风险。然而油价中的信息噪音严重阻碍国际油价对股票市场的预测效果。本文提出的移动平均法可有效减弱信息噪音,研究表明,本文基于移动平均法构建的油价趋势因子对“一带一路”沿线国家股票市场具有良好的样本内和样本外可预测性。进一步研究发现,国际油价波动对产油国和非产油国股票市场的影响存在非对称性。本文为国际油价冲击股票市场提供了新的有力证据,同时本文研究成果提示了油价风险,对维持我国股票市场稳定,保持金融稳定具有一定意义。     

Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price

Deviations from the law of one price between futures and spot prices—the futures-cash basis—capture information about liquidity demand for equity market exposure in global markets. We show that the basis comoves with dealer and investor futures positions, is contemporaneously positively correlated with futures and spot market returns, and negatively predicts futures and spot returns. These findings are consistent with the futures-cash basis reflecting liquidity demand that is common to futures and cash equity markets. We find persistent supply-demand imbalances for equity index exposure reflected in the basis, giving rise to an annual premium of 5% to 6%.     

Price impact and bursts in liquidity provision

This paper analyses brief episodes of high-intensity quote turnover and revision—‘bursts’ in quotes—in the US equity market. Such events occur very frequently, several hundred times a day for actively traded stocks. We find significant price impact associated with these market maker initiated events, about five times higher than during non-burst periods. Bursts in quotes are concurrent with short-lived structural breaks in the informational relationship between market makers and market takers. During bursts, market makers no longer passively impound information from order flow into quotes—a departure from the traditional market microstructure paradigm. Rather, market makers significantly impact prices during bursts in quotes. Further analysis shows that there is asymmetry in adverse selection between the bid and ask sides of the limit order book and only a sub-population of market makers enjoys an informational advantage during bursts. Market makers on the side opposite the burst suffer elevated adverse selection costs, while market makers on the side of the burst realize positive spread, irrespective of the order flow direction. Our results call attention to the need for a new microstructure perspective in understanding modern high-frequency limit order book markets and the quote manipulation strategies at the disposal of the fast market makers.     

TRANSITORY MARKET STATES AND THE JOINT OCCURRENCE OF MOMENTUM AND MEAN REVERSION

In this article we derive and investigate the implications of the Fama–French and Poterba–Summers model—in which the market price of equity contains permanent and temporary components—to explain cross‐sectional differences in equity risk premia and returns. Shocks to the transitory component are regarded a Merton risk factor. We obtain estimates from a simple Kalman decomposition of the market price. The transitory component estimate is used in a conditional capital asset pricing model to test implications of the model related to predictability, cross‐sectional performance, and the existence of momentum and mean reversion.     

Price discovery on the S&P 500 index markets: An analysis of spot index,index futures,and SPDRs

This paper investigates the price discovery function in three S&P 500 index markets: the spot index, index futures, and S&P Depositary Receipts markets. Four hypotheses regarding market structure and security design are proposed to differentiate the price discovery function performed by the three index instruments. Using matched synchronous intraday trading data, Johansen's maximum likelihood estimator is employed to disclose the cointegration relationships among the three markets. Results indicate that the three price series are a cointegrated system with one long-run stochastic trend. Estimated coefficients of the vector error correction model suggest that price adjustment takes place in the spot index market and for SPDRs, but not in the futures market. When the common stochastic trend is decomposed, it is found that the futures market serves the dominant price discovery function. The leverage hypothesis and the uptick rule hypothesis explain its superior price discovery function.     

美国黄金期货与黄金现货互动关系的实证研究

文章通过建立误差修正模型（ Error Correction ModeL,ECM）和基于持有成本理论的误差修正模型（ Error Correction ModeL Cost of Carry,ECM-CoC）,对美国黄金市场的期货与现货市场在金融危机前后的互动关系进行了实证分析。结果表明：在2007年金融危机前美国黄金期货市场引导黄金现货市场,期货市场的价格发现功能得以实现;在金融风暴后美国黄金现货和期货市场存在双向引导关系;美国黄金期货市场和现货市场之间存在长期均衡关系,期货市场和现货市场均存在误差修正机制,美国现货市场价格恢复均衡的调整速度高于黄金期货市场。     

A Pricing Framework for Real Estate Derivatives

New methods are developed here for pricing the main real estate derivatives — futures and forward contracts, total return swaps, and options. Accounting for the incompleteness of this market, a suitable modelling framework is outlined that can produce exact formulae, assuming that the market price of risk is known. This framework can accommodate econometric properties of real estate indices such as predictability due to autocorrelations. The term structure of the market price of risk is calibrated from futures market prices on the Investment Property Databank index. The evolution of the market price of risk associated with all five futures curves during 2009 is discussed.     

Price-Formation Process of an Emerging Futures Market: Call Auction Versus Continuous Auction

This study assesses the market qualities of alternative price-formation processes for an emerging futures market—the Taiwan futures market. In 2002, the price formation process in the market changed during the period of trade between call auction and continuous auction. The performances of call auction and continuous auction are compared using intraday data. Empirical results show that the market is more liquid, and volatility is slightly lower, under continuous auction than under call auction. Also, there is robust evidence that continuous auction improves informative efficiency. The study suggests that for an emerging futures market like that of Taiwan, continuous auction offers a better trading environment for futures trading. In addition to demonstrating the virtue of continuous auction, this study also finds that the asymmetry in volatility is related to the price formation process. The asymmetry effect exists under continuous auction, but not under call auction.