Modeling a Multivariate Transaction Process

In this paper the dynamics of a joint transaction process areinvestigated. The transaction process is characterized by fourmarks: price changes, transaction volumes, bid–ask spreadsand intertrade durations. Based on a copula approach, a modelfor their joint density is proposed, which avoids forcing apriori assumptions on the instantaneous causality relationshipsbetween the four variables as necessary in decomposition models,where the joint density is decomposed into its conditional andunconditional densities. The price change process is treatedas a discrete process and specified with an integer count hurdlemodel and the transaction volumes, bid–ask spreads, andtrade durations processes are modeled along the lines of fractionallyintegrated autoregressive conditional models, which are suitedvery well to capture the high persistency, empirically observedin these processes. The model is applied to three stocks tradedat the New York Stock Exchange (NYSE) in May, 2001 and we investigateseveral market microstructure hypotheses in the empirical partof this paper.     

Dynamics of Trade-by-Trade Price Movements: Decomposition and Models

In this article we introduce a decomposition of the joint distributionof price changes of assets recorded trade-by-trade. Our decompositionmeans that we can model the dynamics of price changes usingquite simple and interpretable models which are easily extendedin a great number of directions, including using durations andvolume as explanatory variables. Thus we provide an econometricbasis for empirical work on market microstructure using timeseries of transaction data. We use maximum likelihood estimationand testing methods to assess the fit of the model to one yearof IBM stock price data taken from the New York Stock Exchange.     

After-Hours Stock Prices and Post-Crash Hangovers

After-hours pricing in foreign equity markets of multiple-listed U.S. securities appeared to be efficient in predicting New York prices in the weeks immediately following the October 1987 crash but relatively uninformative in succeeding months. By contrast, daily changes in New York prices appear to be efficiently incorporated in after-hours trading on both the Tokyo and London exchanges throughout the sample period. This paper suggests that the asymmetry and temporal variations in cross-market correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and time-varying share price volatility.     

Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?

This article compares the bid-ask spread for New York Stock Exchange (NYSE)-listed securities before and after a major third market broker-dealer, Bernard L. Madoff Investment Securities (Madoff), begins to selectively purchase and execute orders in those securities. Tests reveal the quoted bid-ask spread tightens when Madoff enters the market. Furthermore, trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid-ask spread do not increase. Together, these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange-listed securities may be economically insignificant.     

Determinants of bid and ask quotes and implications for the cost of trading

Financial transaction costs are time varying. This paper proposes a model that relates transaction cost to characteristics of order flow. We obtain qualitatively consistent model results for different stocks and across different time periods. We find that an unusual excess of buyers (sellers) relative to sellers (buyers) tends to increase the ask (bid) price. Hence, the ask and bid components of spread change asymmetrically about the efficient price. For a fixed order imbalance surprise these effects are muted when unanticipated total volume is high. Unexpected high volatility in the transaction price process tends to widen the spread symmetrically about the efficient price. Our findings are consistent with predications from market microstructure theory that the cost of market making should depend on both the risk of trading with better-informed traders and inventory risk. We also find that order flow surprises have a significant impact on the efficient price and can also explain a substantial amount of persistence in the volatility of the efficient price. This dependence does not violate the efficient market hypothesis since the surprises, by definition, are not predictable.     

Price discovery and the international flow of information

We document that the opening volatility of American depositary receipts (ADRs) is lower when the trading of the underlying asset overlaps trading of the ADR on the New York Stock Exchange (NYSE). This lower volatility is consistent with the notion that price discovery on the NYSE is enhanced by concurrent trading in the underlying market. We also find that ADR volatility does not change when the underlying market closes, indicating that there is no significant change in the flow of public and private information at that time. This finding suggests that the NYSE becomes the dominant market during periods when both ADRs and their underlying assets are traded.     

Fractal market time

Ané and Geman (2000) observed that market returns appear to follow a conditional Gaussian distribution where the conditioning is a stochastic clock based on cumulative transaction count. The existence of long range dependence in the squared and absolute value of market returns is a ‘stylized fact’ and researchers have interpreted this to imply that the stochastic clock is self-similar, multi-fractal (Mandelbrot, Fisher and Calvet, 1997) or mono-fractal (Heyde, 1999). We model the market stochastic clock as the stochastic integrated intensity of a doubly stochastic Poisson (Cox) point process of the cumulative transaction count of stocks traded on the New York Stock Exchange (NYSE). A comparative empirical analysis of a self-normalized version of the stochastic integrated intensity is consistent with a mono-fractal market clock with a Hurst exponent of 0.75.     

银行间债券市场价格发现功能研究

交易机制会对市场的价格发现功能造成影响。本文基于银行阃债券市场的高频数据,利用VAR模型和脉冲响应,对做市商市场的运行情况进行检验,发现:存货效应和信息不对称对价格发现均有显著影响,而后者的影响更大;交易行为显著正相关,但对价格水平无任何影响;交易价格对新信息的反应速度较快。不存在滞后调整。总体来看,《全国银行间债券市场做市商规定》的出台前后,市场质量无明显改善,这与现行的做市商制度有很大关系。     

Taiwan's Foreign Exchange Market—Volatile but Still Efficient?

This paper investigates the importance of return heterogeneity and volatility for the foreign exchange rate on the New Taiwan (NT) dollar in terms of the U. S. dollar. We describe the price behavior of the foreign exchange market through the Power GARCH (1,1) and EGARCH (1,1) models. The time knots of market events are found to have deep impacts on the behavior of both market agents and the intraday characteristics of the price process. Evidence also reveals that Taiwan's foreign exchange market is semi-strong efficient.     

Price Discovery for Segmented US-Listed Chinese Stocks: Location or Market Quality?

Abstract:  This study extends the cross-listing literature by examining how, and to what extent, the trading of cross-listed China-backed ADRs on the New York Stock Exchange contributes to information flows and price discovery for the corresponding stocks traded in China's A-share market. We find that the cross-listed US prices and Chinese prices are not cointegrated in the long-run and the home market plays a far more important role in both price discovery and volatility spillover than does the US market. The home bias hypothesis still holds for the segmented Chinese A-share market and the location where price discovery actually originates is the essential factor in the process of international information transmission.     

One Security,Many Markets: Determining the Contributions to Price Discovery

When homogeneous or closely-linked securities trade in multiple markets, it is often of interest to determine where price discovery (the incorporation of new information) occurs. This article suggests an econometric approach based on an implicit unobservable efficient price common to all markets. The information share associated with a particular market is defined as the proportional contribution of that market's innovations to the innovation in the common efficient price. Applied to quotes for the thirty Dow stocks, the technique suggests that the preponderance of the price discovery takes place at the New York Stock Exchange (NYSE) (a median 92.7 percent information share).     

Price Interactions in a Sequential Global Market: Evidence from the Cross-listed Stocks

In this paper, we investigate the pattern of dynamic interactions among the prices of those stocks that are cross-listed on the three major stock markets of the world, i.e. New York, London and Tokyo. Major findings are: first, regardless of the nationality of stocks, innovations in the 'home' market returns are always fed into the returns in the 'overseas' markets, with the former causing the latter in the Granger sense. However, innovations in the New York market returns of foreign stocks are fed back into their respective home markets, contributing to the price discovery there. Second, the 'succeeding' overseas market, which operates immediately after the home market, plays a dual-role: it conducts the home market innovations to the next-opening overseas market, as well as adds its own innovations. Third, the exchange rate changes substantially influence the overseas market returns, but not the home market returns. The exchange rates appear to play a role in the transmission mechanism mainly via the inter-market price parity.     

Brokered versus dealer markets: Impact of proprietary trading with transaction fees

In this study, we consider a one-period financial market with a dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors' orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the market-clearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. We find that the bid and ask prices set by the dealer who can engage in proprietary trading are more favorable to average investors. As a result, both the trading volume and the transaction fee increase, and social welfare improves.     

EMPIRICAL EVIDENCE ON THE IMPACT OF THE BID-ASK SPREAD ON THE CHARACTERISTICS OF CRSP DAILY RETURNS

It is widely recognized that Center for Research in Security Prices (CRSP) returns may differ from “true” returns because of the bid-ask effect. Using a large sample of New York Stock Exchange and American Stock Exchange securities, I confirm a discernible bid-ask effect, the magnitude and importance of which decrease with the security's price level (increase with the spread). I find volatility estimates using CRSP returns to be greater than those based on quote returns. However, market model properties, such as β and R², are generally unaffected. Bid-ask effects are clearly apparent in event studies, but because of certain offsetting effects commonly used test statistics remain unaffected. Low-priced stocks (below $2.00) do not conform to these patterns. Finally, the evidence raises the possibility that the existing literature on filter rule tests may underestimate the bid-ask spread component of transaction costs.     

The day-of-the-week effect in foreign exchange markets: multi-currency evidence

To investigate to what extent transaction mechanism matters, we examine the daily returns of 29 foreign exchange rates in the New York market. This paper finds that the day-of-the-week effect existed in the 1980s for some, not all, currencies. The fact that the day-of-the-week effect existed for only some currencies suggests that the US transaction mechanism alone cannot explain the anomaly. Furthermore, this paper finds that the day-of-the-week effect disappears for almost all currencies in the 1990s. This latter result is consistent with previous studies on anomalies in the stock markets.     

Measuring equity market integration using uncorrelated information flows: Tokyo,London and New York

Equity markets do not pass all overnight information into prices instantly at the opening of trade. We adjust open-to-close return series for non-instantaneous information absorption and then use adjusted series to measure integration among three major equity markets. Because the adjusted daytime return series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign open-to-close returns, explains 13% of opening price variation (close-to-open returns) in New York, 14% in Tokyo and 30% in London. For New York and Tokyo, the largest influences come from the market that trades immediately prior (London and New York respectively) whereas opening price variation in London is linked closer with New York than Tokyo. Foreign volatility spillovers are also significant, and subject to asymmetric effects.     

Odd‐lot Costs and Taxation Influences on Stock Dividend Ex‐dates

Abstract:   Past research has revealed significant abnormal ex‐date returns for stock dividends even though the ex‐date is known in advance and the distribution contains no new information. Various researchers have suggested that the higher transaction cost of selling odd‐lot share parcels compared to round‐lot share parcels is a key driver in the abnormal returns. However, no study to date has directly compared the ex‐date price reaction of stock dividends distributed when odd‐lot transaction costs were charged to those issued when odd‐lot costs were not evident. As odd‐lot trade costs were eliminated from the New Zealand Stock Exchange on 1 October, 1991, the New Zealand market provides a unique opportunity to directly test the role, if any, that odd‐lot transactions costs have in explaining stock dividend ex‐date returns. We find that prior to October 1991 stock dividend ex‐dates exhibit significantly positive returns, however, we do not find any significant ex‐date return once the higher odd‐lot transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex‐date price reaction and we find evidence that imputation tax credits have a value greater than zero.     

Correlations in price changes and volatility across international stock markets

The short-run interdependence of prices and price volatilityacross three major international stock market is studied. Dailyopening and closing prices of major stock indexes for the Tokyo,London, and New York stock markets are examined. The analysisutilizes the autoregressive conditionally heteroskedastic (ARCH)family of statistical models to explore these pricing relationship.Evidence of price volatility spillovers from New York to Tokyo,London to Tokyo, and New York to London is observed, but noprice volatility spillover effects in other directions are foundfor the pre-October 1987 period.     

Efficiency Tests of the Foreign Currency Options Market

Based on a new options transactions data base from the Philadelphia Stock Exchange Foreign Currency Options Market, this paper examines the importance of the effect of nonsynchronous prices and transaction costs on the usual option market efficiency tests. The tests conducted are based on the transaction cost adjusted early exercise and put-call parity pricing boundaries applicable to the American foreign currency options market. The test results show that the put-call parity boundary tests are sensitive to both nonsynchronous prices and transaction costs. The early exercise boundary tests are sensitive to transaction costs but are not very sensitive to simultaneity of the option price and the underlying spot price. Under the no-transaction costs scenario, a large number of early exercise boundary violations is found even when simultaneous spot and option prices are used. These violations disappear when actual transaction costs are taken into account.     

Optimal hedging in an extended binomial market under transaction costs

We develop an approach to optimal hedging of a contingent claim under proportional transaction costs in a discrete time financial market model which extends the binomial market model with transaction costs. Our model relaxes the binomial assumption on the stock price ratios to the case where the stock price ratio distribution has bounded support. Non-self-financing hedging strategies are studied to construct an optimal hedge for an investor who takes a short position in a European contingent claim settled by delivery. We develop the theoretical basis for our optimal hedging approach, extending results obtained in our previous work. Specifically, we derive a no-arbitrage option price interval and establish properties of the non-self-financing strategies and their residuals. Based on the theoretical foundation, we develop a computational algorithm for optimizing an investor relevant criterion over the set of admissible non-self-financing hedging strategies. We demonstrate the applicability of our approach using both simulated data and real market data.