The impact of short-selling and margin-buying on liquidity: Evidence from the Chinese stock market

We propose a framework based on limit order book to analyze the impact of short-selling and margin-buying on liquidity. We show that when short-sellers are perceived as informed, adverse selection may lead to uninformed traders withdrawing their limit orders. Given that the Chinese stock market has strong information asymmetry and a high proportion of uninformed traders, we predict that the pilot program launched in March 2010, which lifts restrictions on short-selling and margin-buying for a designated list of stocks, may have a negative impact on liquidity. We perform difference-in-differences tests and show evidence that allowing for short-selling and margin-buying indeed has a significantly negative impact on liquidity for stocks on the designated list. In particular, the negative impact on liquidity is more pronounced for stocks with high information asymmetry. Nevertheless, when short-selling volume dries up due to regulation changes in August 2015, i.e., the “T+1” trading rule on short-selling, we show that consistent with model predictions, lifting restrictions on short-selling and margin-buying has a positive effect on liquidity.     

The information content of a limit order book: The case of an FX market

In this paper we examine the question of whether knowledge of the information contained in a limit order book helps to provide economic value in a simple trading scheme. Given the greater information content of the order book, over simple price information, it might naturally be expected that the order book would dominate. Using Dollar Sterling tick data, we find that despite the in-sample statistical significance of variables describing the structure of the limit order book in explaining tick-by-tick returns, they do not consistently add significant economic value out-of-sample. We show this using a simple linear model to determine trading activity, as well as a model-free genetic algorithm based on price, order flow, and order book information. We also find that the profitability of all trading rules based on genetic algorithms dropped substantially in 2008 compared to 2003 data.     

The submission of limit orders or market orders: The role of timing and information in the Reuters D2000-2 system

Recent work in the market microstructure literature suggests that the speed with which orders arrive in the market impacts traders' order submission decisions. In this study we use an asymmetric autoregressive conditional duration (ACD) model to empirically investigate the influence on the submission of limit and market orders of changes in the time between the past submissions of different types of orders, changes in the slope of the limit order book, and changes in price uncertainty. We find that the expected time between the arrivals of successive orders in the foreign exchange market depends on the previous type of order submitted and the slope on both sides of the order book. Price uncertainty (volatility) plays a secondary role after accounting for the impact of changes in the slope of the order book. Lastly, we find that there are fundamental changes in the level of information contained in the submission of orders at the opening and closing of markets.     

Optimal execution strategies in limit order books with general shape functions

We consider optimal execution strategies for block market orders placed in a limit order book (LOB). We build on the resilience model proposed by Obizhaeva and Wang (2005 Obizhaeva, A and Wang, J. 2005. Optimal trading strategy and supply/demand dynamics, Preprint Available online at: http://www.rhsmith.umd.edu/faculty/obizhaeva/OW060408.pdf (accessed 16 February 2009)[Crossref] , [Google Scholar]) but allow for a general shape of the LOB defined via a given density function. Thus, we can allow for empirically observed LOB shapes and obtain a nonlinear price impact of market orders. We distinguish two possibilities for modelling the resilience of the LOB after a large market order: the exponential recovery of the number of limit orders, i.e. of the volume of the LOB, or the exponential recovery of the bid–ask spread. We consider both of these resilience modes and, in each case, derive explicit optimal execution strategies in discrete time. Applying our results to a block-shaped LOB, we obtain a new closed-form representation for the optimal strategy of a risk-neutral investor, which explicitly solves the recursive scheme given in Obizhaeva and Wang (2005 Obizhaeva, A and Wang, J. 2005. Optimal trading strategy and supply/demand dynamics, Preprint Available online at: http://www.rhsmith.umd.edu/faculty/obizhaeva/OW060408.pdf (accessed 16 February 2009)[Crossref] , [Google Scholar]). We also provide some evidence for the robustness of optimal strategies with respect to the choice of the shape function and the resilience-type.     

Sources of liquidity for NYSE-listed non-US stocks

We examine the components of displayed (quoted) liquidity and the amount of non-displayed liquidity on the NYSE for a sample of non-US stocks. Consistently with prior work, non-US stocks have less displayed liquidity than similar US stocks. Extending prior research, we find that this is true both in the limit order book and on the floor. As Domowitz et al. [Domowitz, I., Glen, J., Madhavan, A., 1998. International cross-listing and order flow migration: Evidence from and emerging market. Journal of Finance 53, 2001–2027] posit, non-US stocks from transparent/linked home markets have more displayed NYSE liquidity when the home market is open but non-US stocks from opaque/non-linked home markets have more NYSE displayed liquidity when the home market is closed. Non-US and US stocks have similar supplies of non-displayed liquidity, consistent with the idea that the conditional nature of non-displayed liquidity allows NYSE traders to mitigate adverse selection problems inherent in trading non-US stocks. Our results imply that non-US stocks have less total (displayed plus non-displayed) liquidity than US stocks.     

The role of volume in order book dynamics: a multivariate Hawkes process analysis

We show that multivariate Hawkes processes coupled with the nonparametric estimation procedure first proposed in Bacry and Muzy [IEEE Trans. Inform. Theory, 2016, 62, 2184–2202] can be successfully used to study complex interactions between the time of arrival of orders and their size observed in a limit order book market. We apply this methodology to high-frequency order book data of futures traded at EUREX. Specifically, we demonstrate how this approach is amenable not only to analyse interplay between different order types (market orders, limit orders, cancellations) but also to include other relevant quantities, such as the order size, into the analysis, showing also that simple models assuming the independence between volume and time are not suitable to describe the data.     

More on a statistical analysis of log-periodic precursors to financial crashes

In this paper, we extend the existing empirical evidence on the relationship between the state of the limit order book (LOB) and order choice. Our contribution is twofold: first, we propose a sequential ordered probit (SOP) model which allows studying patient and impatient traders’ choices separately; second, we consider two pieces of LOB information, the best quotes and the book beyond the best quotes. We find that both pieces of LOB information explain the degree of patience of an incoming trader and, afterwards, its order choice. Nonetheless, the best quotes concentrate most of the explanatory power of the LOB. The shape of the book beyond the best quotes is crucial in explaining the aggressiveness of patient (limit order) traders, while impatient (market order) traders base their decisions primarily on the best quotes. Patient traders’ choices depend more on the state of the LOB on the same side of the market, while impatient traders mostly look at the state of the LOB on the opposite side. The aggressiveness of both types of traders augments with the inside spread. However, patient (impatient) traders submit more (less) aggressive limit (market) orders when the depth of the own (opposite) best quote and the length of the own (opposite) side of the book increase. We also find that higher depth away from the best ask (bid) quote may signal that this quote is ‘too low (high)’, causing incoming impatient buyers (sellers) to be more aggressive and incoming patient sellers (buyers) to be more conservative.     

High-dimensional Hawkes processes for limit order books: modelling,empirical analysis and numerical calibration

High-dimensional Hawkes processes with exponential kernels are used to describe limit order books in order-driven financial markets. The dependencies between orders of various types are carefully studied and modelled, based on a thorough empirical analysis. The observation of inhibition effects is particularly interesting, and leads us to the use of non-linear Hawkes processes. Specific attention is devoted to the calibration problem, in order to account for the high dimensionality of the problem and the very poor convexity properties of the MLE. Our analyses show a good agreement between the statistical properties of order book data and those of the model.     

Determinants of yield spread dynamics: Euro versus US dollar corporate bonds

This paper presents a systematic comparison between the determinants of euro and US dollar yield spread dynamics. The results show that US dollar yield spreads are significantly more affected by changes in the level and the slope of the default-free term structure and the stock market return and volatility. Surprisingly, euro yield spreads are strongly affected by the US (and not the euro) level and slope. This confirms the dominance of US interest rates in the corporate bond markets. Interestingly, I find that liquidity risk is higher for US dollar corporate bonds than euro corporate bonds. For both regions, the effect of changes in the bid-ask spread is mainly significant during periods of high liquidity risk. Finally, the results indicate that the credit cycle as measured by the region-specific default probability significantly increases US yield spreads. This is not the case for euro yield spreads.     

Modelling the shape of the limit order book

This article develops a parsimonious way to use the shape of the limit order book to produce an estimate of the asset price. The posited model captures and describes the evolution of the distribution of limit orders on the bid and ask sides of the LOB during the trading session and provides estimates of the execution asset price over time. The performance of the model is evaluated against some existing standards from the market microstructure literature during the trading session. Empirical evidence on listed companies confirm a strong contribution of our methodology to the innovation in asset prices, according to the information share coefficients. We also document a significant improvement relative to the Hasbrouck [J. Finance, 1991, 46, 179–207] model when our model estimates are included as regressors.     

Estimating the bid-ask spread in a heteroskedastic market: The case of foreign currency futures

Because the bid-ask spread often defies direct measurement, a serial covariance-based approach is frequently used to estimate it. We develop a new serial covariance estimator that exploits the relation of time-varying volatility to trading activity to obtain more precise estimates. The performance of Roll's (1984) estimator and the new estimator are compared using intraday data for four foreign currency futures. The new estimator finds currency futures spreads to be of economic significance—usually two to three ticks, or $25.00 to $37.50 per contract. A distinct maturity effect is present, with the lowest spreads occurring one to three months from expiration. While no evidence is found that the intraday spread changes near closing, the spread is larger near opening for some contracts four to six months from expiration.The University of Texas at Austin. We appreciate the comments of Katherine Daigle, Scott Irwin, Dan Quan, Barry Schachter, workshop participants at the University of Houston, and three anonymous referees. Part of this work was completed while Laux was visiting the Commodity Futures Trading Commission, and the support of the Commission is appreciated.     

Estimation of slowly decreasing Hawkes kernels: application to high-frequency order book dynamics

We present a modified version of the non parametric Hawkes kernel estimation procedure studied in Bacry and Muzy [arXiv:1401.0903, 2014] that is adapted to slowly decreasing kernels. We show on numerical simulations involving a reasonable number of events that this method allows us to estimate faithfully a power-law decreasing kernel over at least six decades. We then propose a eight-dimensional Hawkes model for all events associated with the first level of some asset order book. Applying our estimation procedure to this model, allows us to uncover the main properties of the coupled dynamics of trade, limit and cancel orders in relationship with the mid-price variations.     

The rules of standard‐setting organizations: an empirical analysis

This article empirically explores standard‐setting organizations' policy choices. Consistent with our earlier theoretical work, we find (i) a negative relationship between the extent to which an SSO is oriented to technology sponsors and the concession level required of sponsors and (ii) a positive correlation between the sponsor friendliness of the selected SSO and the quality of the standard. We also develop and test two extensions of the earlier model: the presence of provisions mandating royalty‐free licensing is negatively associated with disclosure requirements, and the relationship between concessions and user friendliness is weaker when there is only a limited number of SSOs.     

Universal features of price formation in financial markets: perspectives from deep learning

Using a large-scale Deep Learning approach applied to a high-frequency database containing billions of market quotes and transactions for US equities, we uncover nonparametric evidence for the existence of a universal and stationary relation between order flow history and the direction of price moves. The universal price formation model exhibits a remarkably stable out-of-sample accuracy across a wide range of stocks and time periods. Interestingly, these results also hold for stocks which are not part of the training sample, showing that the relations captured by the model are universal and not asset-specific.

The universal model—trained on data from all stocks—outperforms asset-specific models trained on time series of any given stock. This weighs in favor of pooling together financial data from various stocks, rather than designing asset- or sector-specific models, as is currently commonly done. Standard data normalizations based on volatility, price level or average spread, or partitioning the training data into sectors or categories such as large/small tick stocks, do not improve training results. On the other hand, inclusion of price and order flow history over many past observations improves forecast accuracy, indicating that there is path-dependence in price dynamics.     

The determinants of bank interest rate margins: an international study

This paper studies the determinants of bank net interest margins (NIMs) in six selected European countries and the US during the period 1988–1995 for a sample of 614 banks. We apply the Ho and Saunders model (Ho, T., Saunders, A., 1981. The determinants of bank interest margins: theory and empirical evidence. Journal of Financial and Quantitative Analyses 16, 581–600) to a multicountry setting and decompose bank margins into a regulatory component, a market structure component and a risk premium component. The regulatory components in the form of interest-rate restrictions on deposits, reserve requirements and capital-to-asset ratios have a significant impact on banks NIMs. The empirical results suggest an important policy trade-off between assuring bank solvency—high capital-to-asset ratios—and lowering the cost of financial services to consumers—low NIMs. The more segmented or restricted the banking system—both geographically and by activity—the larger appears to be the monopoly power of existing banks, and the higher their spreads. Macro interest-rate volatility was found to have a significant impact on bank NIMs; this suggests that macro policies consistent with reduced interest-rate volatility could have a positive effect in reducing bank margins.     

The effect of country-specific index trading on closed-end country funds: an empirical analysis

The American Stock Exchange initiated trading in 17 World Equity Benchmark Shares (acronym “WEBS”™) in April 1996. WEBS are index funds designed to track the Morgan Stanley Capital International (MSCI) indexes. We examine the effect of this event on closed-end country funds (CECFs) and find that percentage discounts increase. CECFs with a corresponding WEBS index experience the largest increase and also show a decline in trading volume. We attribute these results to (1) the effects of increased competition and (2) a reduction in the market segmentation premium. Since additional WEBS have begun trading, and other approvals may follow, similar effects could be experienced in the future.     

The Effect of Market Transparency: Volatility and Liquidity in the Korean Stock Market

Faced with unprecedented competition, stock markets should have fairness and transparency. The effects of market transparency for the stock market volatility and liquidity will be investigated using the case of the Korean stock market. The evidence from this study indicates that increasing the market transparency makes the price discovery process more efficient than before from the viewpoint of stock market volatility, and increases the stock market liquidity compared with before.     

The revaluation of assets as a signalling device: a theoretical and an empirical analysis

In many countries, firms can choose whether or not to report a revaluation in the financial statements. An analytical model is developed to indicate conditions in which it is more likely that successful firms will choose not to revalue assets as a credible signal to potential investors. These industry settings include a high variance in performance and low equity-to-debt ratios. The empirical results for Belgium confirm that successful firms are less likely to revalue assets in those industries. However, only the revaluation of fixed tangible assets and not financial assets seems to be a credible signal. Finally, the results support the choice to revalue, but not the amount of revaluation, as a signalling device.     

出口信用保险对我国出口贸易影响的实证分析

出口作为拉动经济发展的＂三驾马车＂之一,在我国经济发展中起到举足轻重的作用,为了促进出口贸易的发展,我国实施了多项出口贸易鼓励政策。本文对出口退税、出口信用保险、出口贸易三个变量进行协整分析,并通过VAR模型估计以及脉冲响应函数及方差分解的实证分析,得出三个变量的相互关系;同时通过两个因素的实证比较,得出出口信用保险虽然在短期内对出口贸易的影响还不够显著,但从长期看却是显著的,并且要大于出口退税对出口贸易的影响程度,最后提出发展我国出口信用保险的政策建议。     

The liquidity effects of revisions to the S&P 500 index: an empirical analysis

We study liquidity effects following S&P 500 index revisions. Using a recent sample of S&P 500 additions, we find a sustained increase in the liquidity of the added stocks. Further, the improvement in the liquidity of added stocks is due primarily to a decrease in the direct cost of transacting and a smaller decline in the asymmetric information component. Finally, the event period cumulative abnormal returns for additions are significantly associated with the decrease in the effective spread, particularly the decline in the direct cost of transacting. In contrast, the liquidity of deleted stocks declines over the three months following deletion.