Commodity financialization and funding liquidity in China

This study examines commodity financialization in China through commodity futures and stock market price co-movement, captured by a dynamic conditional correlation multivariate GARCH model (DCC-MGARCH). We find a dramatic increase in correlation after 2004; however, after 2010, the correlation decreases. We further investigate how funding liquidity affectes commodity financialization and find that its effect on the industrial sector is stronger than that on the agricultural sector, which reflects commodity financialization layering.     

Funding liquidity risk and the low-volatility anomaly: Evidence from the Taiwan stock market

We investigate whether the funding liquidity risk to institutional investors influences the negative relation between expected returns and variance (the ‘‘Low-volatility anomaly’’). With the Taiwan stock market as a setting, we implement a multivariate Markov switching model and use the funding liquidity risk to model the time-varying transition probabilities of the regime-switching process to capture changes in the funding liquidity risk regime. Our evidence documents that the low-volatility anomaly is most pronounced when there is high funding liquidity risk. When there is low funding liquidity risk, however, the low-volatility anomaly has a significant reversal. These results imply that the increased funding liquidity risk due to financial shock transmitted from parent banks is associated with higher selling pressure on institutional investors’ high-volatility stocks, leading to the low-volatility anomaly.     

The impact of reduced pre-trade transparency regimes on market quality

This paper studies the effects of pre-trade quote transparency on spread, price discovery and liquidity in an artificial limit order market with heterogeneous trading rules. Our agent-based numerical experiments suggest that full quote transparency incurs substantial transaction costs to traders and dampens trading activity in an order-driven market. Our finding reveals that exogenous restriction of displayed depth, up to several best quotes, does not benefit market performance. On the contrary, endogenous restriction of displayed quote depth, by means of iceberg orders, improves market quality in multiple dimensions: it reduces average transaction costs, maintains higher liquidity and moderate volatility, balances the limit order book, and enhances price discovery.     

Spillovers between sovereign CDS and exchange rate markets: The role of market fear

As important variables in financial market, sovereign credit default swaps (CDS) and exchange rate have correlations and spillovers. And the volatility spillovers between the two markets become further complicated with the effect of market fear caused by extreme events such as global pandemic. This paper attempts to explore the complex interactions within the “sovereign CDS-exchange rate” system by adopting the forecast error variance decomposition method. The results show that there is a relatively close linkage between the two markets and the total spillover index of the system is dynamic. For most of the past, the exchange rate has a higher spillover effect on the sovereign CDS than vice versa. Moreover, after the market fear variables are introduced, the “sovereign CDS-exchange rate” system and market fear variables present bidirectional spillovers. The results of the study have particular significance for maintaining the financial stability and preventing risk contagion between markets.     

European quanto option pricing in presence of liquidity risk

In this paper, we study the pricing problems of the European quanto options in which the underlying foreign asset is in imperfectly liquid markets. First, we assume that the dynamics of the underlying foreign asset price are affected by market liquidity and propose a liquidity-adjusted quanto model. This allows for the effects of market liquidity on European quanto option pricing. And then we derive the analytical pricing formulas for four different types of European quanto options. Finally, we empirically investigate the pricing performance of our proposed model with a European quanto construction involving the SSE 50 ETF, as the underlying asset, and the CNY/HKD exchange rate. Empirical results demonstrate that the pricing accuracy of the proposed model is markedly superior to that of the Black-Scholes quanto model. In other words, allowing for liquidity risk in the framework of European quanto option pricing can make markedly improvements in fitting the real market data. Particularly, the improvement rate is high for medium-term and out-of-the-money options. Moreover, these results are robust for different liquidity measures.     

The effects of employee stock ownership on stock liquidity: Evidence from the Korean market

This study investigates the relationship between the level of employee stock ownership (ESO) and stock liquidity. Using Korean ESO data, we find that ESO is positively associated with various liquidity measures. Stock-owning employees tend to mitigate information asymmetry to increase their benefits from the transparent market. We also find stronger effects when the firm is not an affiliate of a chaebol family group, and is less monitored by financial analysts, foreign investors, and outside directors. Furthermore, we employ various robustness tests to mitigate potential endogeneity concerns.     

Value and liquidity under changing market conditions

Papers studying the liquidity of a market tend to focus on decisions involving the trade-off between the selling price and the time-till-sale for a given set of market conditions. This paper characterizes market conditions using a price-probability locus; a change in market conditions is some combination of changes in the level and/or slope of this locus. I show how the effect of either type of change on price and on the probability-of-sale can be decomposed into those commonly associated with an increase in the value and those which involve a substitution between price and probability. Two adding-up conditions restrict the set of possible predictions. Though the discussion focusses on real estate market, where scarcity is rationed by a mechanism which combines search and bargaining, the same ideas apply to markets with other types of selling mechanisms.     

Price stickiness and markup variations in market games

In this paper, we show that the Shapley–Shubik market game model with production naturally generates an equilibration mechanism that can accommodate price stickiness arising from strategic interactions of firms. Unlike New Keynesian models that show similar price stickiness results, the market game model does not require enforcing menu costs or other additional restraints on price adjustment mechanisms in order to generate price stickiness. As such, we suggest that the market game model can provide a good micro-foundation for macroeconomic analysis. We then explicitly show the relationship between a typical firm’s markup of price over marginal cost and its market share.     

The outbreak of COVID-19 and stock market liquidity: Evidence from emerging and developed equity markets

The outbreak of the novel corona virus has heightened concerns surrounding the adverse financial effects of the outbreak on stock market liquidity and economic policies. This paper contributes to the emerging strand of studies examining the adverse effects of the virus on varied aspect of global markets. The paper examines the causality and co-movements between COVID-19 and the aggregate stock market liquidity of China, Australia and the G7 countries (Canada, France, Italy, Japan, Germany, the UK and the US), using daily three liquidity proxies (Amihud, Spread and Traded Value) over the period December 2019 to July 2020. Our empirical analysis encompasses wavelet coherence and phase-differences as well as a linear Granger causality test. Linear causality test results suggest that a causal relationship exists between the number of cases of COVID 19 infections and stock market liquidity. To quantitatively examine the degree of causality between COVID-19 outbreak and stock market liquidity, we employ the continuous wavelet coherence approach with results revealing the unprecedented impact of COVID-19 on stock market liquidity during the low frequency bands for countries that were hard hit with the COVID-19 outbreak, i.e., Italy, Germany, France, the UK and the US. Further, evidence shows that there is a heterogeneous lead-lag nexus across scales for the entire period of the study.     

Stock liquidity and stock prices crash-risk: Evidence from India

In this paper, we examine the role of stock liquidity as a governance mechanism to discipline managers for withholding bad news (stock price crash-risk). This topic is useful to emerging markets because the dominance of controlling owners limits the monitoring of internal governance. Stock liquidity can be altered by the financial market regulations, thereby improving firm-level governance. In empirical analysis, we show that stock liquidity decreases stock price crash-risk. We identify two possible mechanisms through which stock liquidity reduces stock price crash-risk: the threat of intervention and price informativeness.     

The impact of ADR activity on stock market liquidity: Evidence from Latin America

This paper examines the impact of ADR activity on liquidity of four major Latin American stock markets. We construct a measure of ADR activity in U.S. markets for a sample of ADRs trading during January 2003–December 2010, which is subsequent to the financial liberalization episodes and currency crises that shocked emerging markets in the 1990s. The sample lists 164 depositary receipt programs (Levels I, II, and III): 16 from Argentina, 81 from Brazil, 19 from Chile, and 48 from Mexico. Using System GMM methods to handle the potential effects from stock market development on economic growth and ADR issuance, we find that higher ADR turnover in U.S. markets has positive effects on domestic market turnover, particularly for issuance of exchange-listed (Levels II and III) ADRs. This positive relationship is not a statistical artifact created by the global financial crisis of 2008.     

Optimal order display in limit order markets with liquidity competition

Order display is associated with benefits and costs. Benefits arise from increased execution-priority, while costs are due to adverse market impact. We analyze a structural model of optimal order placement that captures trade-off between the costs and benefits of order display. For a benchmark model of pure liquidity competition, we give a closed-form solution for optimal display sizes. We show that competition in liquidity supply incentivizes the use of hidden orders to prevent losses due to over-bidding. Thus, because aggressive liquidity competition is more prevalent in liquid stocks, our model predicts that the proportion of hidden liquidity is higher in liquid markets. Our theoretical considerations ares supported by an empirical analysis using high-frequency order-message data from NASDAQ. We find that there are no benefits in hiding orders in il-liquid stocks, whereas the performance gains can be significant in liquid stocks.     

Spillovers of currency carry trade returns,market risk sentiment,and U.S. market returns

This paper examines the link between spillovers of currency carry trade returns and U.S. market returns. Following Tse and Zhao (2012), this paper hypothesizes that the magnitude of spillovers of currency carry trade returns is positively correlated with market risk sentiment and, therefore, has an impact on market returns. Using the G10 currencies and S&P 500 index futures, the empirical results present a high magnitude of spillover effects of currency carry trade markets. The empirical findings also show a significantly positive relationship between spillovers of currency carry trade returns and subsequent market returns. Furthermore, the results indicate that this relationship is stronger in bear markets than in bull markets. Finally, our findings show that spillovers of currency carry trade returns significantly affect the subsequent transition probabilities of market returns.     

Evolution and market behavior with endogenous investment rules

In a repeated market for short-lived assets, we investigate wealth-driven selection among investment rules that depend on endogenous market variables, such as current and past prices. We study the random dynamical system describing prices and wealth dynamics and characterize local stability of the long-run equilibria in which one or a group of traders dominate. Multiplicity of stable and unstable equilibria, leading to path dependency and persistent heterogeneity, turns out to be a common phenomenon generated by two different mechanisms. Firstly, conditioning investment decisions on endogenous market variables implies that the relative performance of investment rules, in terms of average growth rates, may be different for different prevailing prices, so that the market may fail to select a global winner. Secondly, the feedback existing between past asset prices and current investment decisions can lead to a form of deterministic overshooting.     

Impact of leveraged ETF trading on the market quality of component stocks

We investigate the effect of leveraged ETF trading on the trading activity and market quality of their component stocks. The results show that both quoted and effective spreads of component stocks increase about 0.2–3.0 basis points after the inception of leveraged ETFs, while other liquidity measures do not show significant changes. The trading volume of component stocks is positively and significantly correlated with the trading volume of leveraged ETFs, but the volatility of component stocks is not affected by ETF trading either at the daily level or during the last hour of trading. In addition, the volatility of component stocks decreases slightly after ETF inception. These findings do not support the previous claim that the trading of leveraged ETFs increases price volatility of component stocks.     

我国金融市场间溢出效应研究——基于四元VAR-GARCH(1,1)-BEKK模型的分析

汇率改革以来,政府实施了一系列金融市场改革,促使金融市场一体化程度显著提高,增强了金融市场间联系。本文采用四元VAR(6)-GARCH(1,1)-BEKK模型分析了我国主要金融市场(股票市场、债券市场、外汇市场以及货币市场)的溢出关系。研究发现,上述市场有很强的波动集聚性和持续性,大多数金融市场间存在显著的双向均值溢出,所有市场间均存在显著的双向波动溢出,还发现市场间溢出可能主要来自于市场传染效应。据此,本文认为政府应该采取合理有效的监管框架,监控金融市场参与者的资本金状况,防止金融市场大幅波动,降低风险累积程度,并在执行货币政策时,兼顾金融市场价格变化对货币政策执行效力的影响。     

The effect of market sentiment and information asymmetry on option pricing

This work addresses the impact of imperfections, such as information asymmetry and market sentiment, on the performance of option pricing models. More precisely, this work compares the option pricing model of Black and Scholes and the same model in the presence of imperfections. This study is based on S&P 500 options that cover the period between 17/03/2000 and 14/06/2013. The achieved results show that, in general, in the presence of imperfections, the model is more effective than the Black and Scholes model. This research appears to be promising for the incorporation of imperfections into the assessment of options.     

权证市场和基础市场关系研究——基于二元GARCH模型的实证分析

本文首先通过建立ARIMA(p,0,q)模型将交易量变动率分成预期的和非预期的两个变量,然后列入到二元GARCH(1,1)模型的条件均值方程中,来研究股票市场和权证市场之间的信息不对称关系。同时通过使用BEEK模型的设定形式作为GARCH模型的条件方差方程,来研究股票市场和权证市场之间的交易量波动溢出关系。通过实证研究,结果表明我国的股票市场和权证市场之间确实存在显著的信息不对称效应和双向的交易量波动溢出效应,且这种波动溢出现象也具有一定的"不对称性"。     

Impact of Basel III liquidity regulations on U.S. Bank performance in different conditional profitability spectrums

We study the impact of the Basel III liquidity constraints, represented by the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), on bank profitability, by employing the simultaneous quantile regression framework with time fixed effects. We find a positive and significant relationship between the LCR and profitability and the NSFR and profitability over most quantiles. However, the small magnitudes of the coefficients on LCR and NSFR across all quantiles of profitability suggest that LCR and NSFR have a minor quantitative impact on bank profitability. We then test and find that the Basel III liquidity constraints have a significantly different impact on banks with very low profits compared to banks who enjoy high profitability, emphasizing the need to use a quantile approach. We plot the coefficients to illustrate the impact of liquidity constraints across different conditional profitability spectrums. Lastly, we find that small banks are more vulnerable to short term liquidity risks (LCR) and big banks are more susceptible to medium to long term liquidity risks (NSFR). This suggests that considerations should be given to tailoring liquidity regulations based on the bank size and the relative bank profitability. The quantitatively small impact of the constraints suggest that Basel III has successfully set liquidity requirements to minimize the impact on bank profitability and the likelihood of an industry-wide liquidity crisis.