Short sales and speed of price adjustment: Evidence from the Hong Kong stock market

We present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private/public firm-specific information but also market-wide information. Shortable stocks are characterized by weaker trade continuity and stronger quote reversals. They adjust faster to new information than non-shortable counterparts. These findings remain robust even in an “up” market condition in which short sales are not binding. The amount of information incorporated in each trade is also significantly higher for shortable than non-shortable stocks in both “up” and “down” market conditions. After controlling for firm size, trading volume, liquidity, price and option trading, short sales stand out as one of the significant factors that speed up the price adjustment.     

Regulatory pressure and fire sales in the corporate bond market

This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. As insurance companies hold over one-third of investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties. Using insurance company transaction data, we find that insurance companies that are relatively more constrained by regulation are more likely to sell downgraded bonds. Bonds subject to a high probability of regulatory-induced selling exhibit price declines and subsequent reversals. These price effects appear larger during periods when the insurance industry is relatively distressed and other potential buyers' carpital is scarce.     

Information transfers and learning in financial markets: Evidence from short selling around insider sales

We document significant increases in short positions on days when company insiders sell their firms’ shares. Short selling increases before insider sales are publicly reported and often before insiders finish selling. Furthermore, the magnitude of short selling activity is consistent with short sellers’ knowledge of the insider’s rank (e.g., CEO, CFO, or a lower-ranked manager) and with knowledge of the unobservable size of the insider’s trading position. We show that short sellers’ superior timing is consistent with (i) monitoring of order flow and (ii) obtaining price-relevant information from brokerages that execute insider sales. Some of our results extend to insider purchases.     

Uncertainty,market structure,and liquidity

In this study we show that market uncertainty [measured by the Chicago Board Options Exchange Market Volatility Index (VIX)] exerts a large market-wide impact on liquidity, which gives rise to co-movements in individual asset liquidity. The effect of VIX on stock liquidity is greater than the combined effects of all other common determinants of stock liquidity. We show that the uncertainty elasticity of liquidity (UEL: percent change in liquidity given a 1% change in VIX) has increased around regulatory changes in the US markets that increased the role of public traders in liquidity provision, reduced the minimum allowable price variation, weakened the affirmative obligation of NASDAQ dealers, and abolished the specialist system on the NYSE.     

Operating and stock market performance of state-owned enterprise privatizations: The Spanish experience

We investigate the operating and stock market performance of Spanish state-owned enterprises (SOEs) privatized through public share issue offerings (SIPs) from 1990 to 2001, when the last SIP was conducted. We compare the performance of SOEs and privately-owned firms. We find significant operating improvements in Spanish SOEs after the privatization. Specifically, they show significant increases in income efficiency, real sales and employment. Spanish governments tried to minimize the foregone proceeds when selling SOE shares and underpriced them lower than private firms. We relate these results with the pressure of the Maastricht Treaty fiscal criteria, as well as lower information asymmetries between firms and investors. Finally, we do not find long-term abnormal stock market performance after SIPs.     

The 2008 short sale ban: Liquidity, dispersion of opinion, and the cross-section of returns of US financial stocks

This study examines the cross-sectional impact of the 2008 short sale ban on the returns of US financial stocks. Motivated by the large cross-sectional variation in the extent to which banned stocks suffer an illiquidity shock, we hypothesize that stocks with larger liquidity declines are associated with poorer contemporaneous stock returns. The evidence supports this hypothesis and suggests that this effect is stronger for more liquid stocks, as predicted by Amihud and Mendelson (1986). Moreover, consistent with Miller’s (1977) model, we report a valuation reversal whereby stocks with higher abnormal returns at the onset of the ban have lower abnormal returns at its removal. Our findings are robust when we control for firms most affected by TARP, include non-banned matched firms, and compare banned firms’ stock returns with their bond returns. From a policy standpoint, the ban reduced valuations, ceteris paribus, of the stocks that were hardest hit by illiquidity.     

Exchange trading rules and stock market liquidity

We examine stock exchange trading rules for market manipulation, insider trading, and broker–agency conflict, across countries and over time, in 42 stock exchanges around the world. Some stock exchanges have extremely detailed rules that explicitly prohibit specific manipulative practices, but others use less precise and broadly framed rules. We create new indices for market manipulation, insider trading, and broker–agency conflict based on the specific provisions in the trading rules of each stock exchange. We show that differences in exchange trading rules, over time and across markets, significantly affect liquidity.     

The impact of central clearing on counterparty risk,liquidity, and trading: Evidence from the credit default swap market

This paper examines the impact of central clearing on the credit default swap (CDS) market using a sample of voluntarily cleared single-name contracts. Consistent with central clearing reducing counterparty risk, CDS spreads increase around the commencement of central clearing and are lower than settlement spreads published by the central clearinghouse. Furthermore, the relation between CDS spreads and dealer credit risk weakens after central clearing begins, suggesting a lowering of systemic risk. These findings are robust to controls for frictions in both CDS and bond markets. Finally, matched sample analysis reveals that the increased post-trade transparency following central clearing is associated with an improvement in liquidity and trading activity.     

Decimals And Liquidity: A Study Of The Nyse

Using a carefully constructed matched sample of control (nondecimal) stocks, we isolate the effects of decimalization for a sample of NYSE‐listed common stocks trading in decimals. We find that the quoted depth as well as the quoted and effective bid‐ask spreads declined significantly following decimalization. Additionally, both the number of trades and trading volume declined significantly. Stock return volatilities display an initial increase but a decline over the longer term, probably as traders become more comfortable in their new milieu.     

Recent trends in trading activity and market quality

We explore the sharp uptrend in recent trading activity and accompanying changes in market efficiency. Higher turnover has been associated with more frequent smaller trades, which have progressively formed a larger fraction of trading volume over time. Evidence indicates that secular decreases in trading costs have influenced the turnover trend. Turnover has increased the most for stocks with the greatest level of institutional holdings, suggesting professional investing as a key contributor to the turnover trend. Variance ratio tests suggest that more institutional trading has increased information-based trading. Intraday volatility has decreased and prices conform more closely to random walk in recent years. The sensitivity of turnover to past returns has increased and cross-sectional predictability of returns has decreased significantly, revealing a more widespread use of quantitative trading strategies that allow for more efficient securities prices.     

Local market makers, liquidity and market quality

We examine the role of geographically proximate (local) market makers in providing liquidity and improving the quality of a dealer market. Firms with active participation of local dealers enjoy lower quoted and effective spreads, as well as more informative prices. The beneficial effects from local market makers are not confined to a few “top” local dealers and they cannot be attributed to their participation in the firm's IPO syndicate or industry specialization. Further, we find that days with aggressive bidding from local market makers relative to their non-local counterparts are associated with significant positive abnormal returns, consistent with local market makers possessing information advantages. In summary, our results suggest that the information advantages of local market makers may be a contributing factor to the reduction in the cost of trading.     

Quote-based competition,market share,and execution quality in NASDAQ-listed securities

We show that competitive quotes help increase dealer market share on NASDAQ, despite the fact that a large proportion of order flow is preferenced. We find that decimal pricing and the introduction of new trading platforms such as SuperSOES and SuperMontage have significantly changed the effect of quote aggressiveness on dealer market share. In particular, decimal pricing reduces (increases) the price (size) elasticity, SuperSOES increases the size elasticity, and SuperMontage increases both the size and price elasticity of dealer market share. We also show that market centers provide greater price improvements and faster executions when they post competitive quotes.     

Automation, speed, and stock market quality: The NYSE's Hybrid

Automation and trading speed are increasingly important aspects of competition among financial markets. Yet we know little about how changing a market's automation and speed affects the cost of immediacy and price discovery, two key dimensions of market quality. At the end of 2006 the New York Stock Exchange introduced its Hybrid Market, increasing automation and reducing the execution time for market orders from 10 seconds to less than one second. We find that the change raises the cost of immediacy (bid-ask spreads) because of increased adverse selection and reduces the noise in prices, making prices more efficient.     

Political geography and stock returns: The value and risk implications of proximity to political power

We show that political geography has a pervasive effect on the cross-section of stock returns. We collect election results over a 40-year period and use a political alignment index (PAI) of each state's leading politicians with the ruling (presidential) party to proxy for local firms’ proximity to political power. Firms whose headquarters are located in high PAI states outperform those located in low PAI states, both in terms of raw returns, and on a risk-adjusted basis. Overall, although we cannot rule out indirect political connectedness advantages as an explanation of the PAI effect, our results are consistent with the notion that proximity to political power has stock return implications because it reflects firms’ exposure to policy risk.     

THE IMPACT OF MARKET MAKER CONCENTRATION ON ADVERSE‐SELECTION COSTS FOR NASDAQ STOCKS

We examine the impact of market maker concentration on adverse‐selection costs for NASDAQ stocks and find that more market makers results in lower costs. Furthermore, this reduction in adverse selection exceeds the overall reduction in spreads that is attributable to market maker competition. We hypothesize that order flow internalization is increasing in market makers and allows for greater information production, and is an explanation for our findings. Our results provide an explanation for the puzzle documented by previous work that finds that adverse‐selection costs for NASDAQ tend to be lower than for the New York Stock Exchange, whereas spreads tend to be higher.     

The disposition effect and investor experience

We examine whether investing experience can dampen the disposition effect, that is, the fact that investors seem to hold on to their losing stocks to a greater extent than they hold on to their winning stocks. To do so, we devise a computer program that simulates the stock market. We use the program in an experiment with two groups of subjects, namely experienced investors and undergraduate students (the inexperienced investors). As a control procedure, we consider random trade decisions made by robot subjects. We find that though both human subjects show the disposition effect, the more experienced investors are less affected.     

The good news in short interest

Stocks with relatively high short interest subsequently experience negative abnormal returns, but the effect can be transient and of debatable economic significance. In contrast, relatively heavily traded stocks with low short interest experience both statistically and economically significant positive abnormal returns. These positive returns are often larger (in absolute value) than the negative returns observed for heavily shorted stocks. Thus, the positive information associated with low short interest, which is publicly available, is only slowly incorporated into prices, which raises a broader market efficiency issue. Our results also cast doubt on existing theories of the impact of short sale constraints.     

The market for borrowing corporate bonds

This paper describes the market for borrowing corporate bonds using a comprehensive data set from a major lender. The cost of borrowing corporate bonds is comparable to the cost of borrowing stock, between 10 and 20 basis points, and both have fallen over time. Factors that influence borrowing costs are loan size, percentage of inventory lent, rating, and borrower identity. There is no evidence that bond short sellers have private information. Bonds with Credit Default Swaps (CDS) contracts are more actively lent than those without. Finally, the 2007 Credit Crunch does not affect average borrowing costs or loan volume, but does increase borrowing cost variance.     

The intraday behaviors and relationships with its underlying assets: evidence on option market in Taiwan

In this paper, we use daily data to investigate the information asymmetric effects and the relationships between the trading volume of options and their underlying spot trading volume. Our results reveal that options with higher liquidity are near-the-money and expiration periods with 2 to 4 weeks have higher trading activity. We classify them into two parts with the ARIMA model: the expected trading activity impact and the unexpected trading activity impact. Using the bivariate generalized autoregressive conditional heteroscedasticity (GARCH) model, we investigate the trading activity effect and information asymmetric effect. In conclusion, the trading volume volatility of the spot and options markets move together, and a greater expected and unexpected trading volume volatility of the spot (options) market is associated with greater volatility in the options (spot) market. However, both markets generate higher trading volume volatility when people expect such an impact rather than when they do not. We also find that there are feedback effects within these two markets. Furthermore, when the spot (options) market has negative innovations, it generates a greater impact on the options (spot) market than do positive innovations. Finally, the conditional correlation coefficient between the spot and the option markets changes over time based on the bivariate GARCH model.     

Common liquidity shocks and market collapse: Lessons from the market for perps

We show how a high degree of commonality in investor liquidity shocks can diminish incentives for intermediaries to keep markets open and lead to market collapse, even without information asymmetry or news affecting fundamentals. We motivate our model using the perpetual floating-rate note market where two years of explosive growth – in which issues by high quality borrowers were placed with institutional investors and traded in a liquid secondary market – were followed by a precipitous collapse when market intermediaries withdrew due to large order imbalances. We shed new light on the trade-off between ownership concentration and market liquidity.