A model of information diffusion with asymmetry and confidence effects in financial markets

We present a model of multi-period continuous information diffusion in financial markets. We show that price and trading volume exhibit asymmetric term structures to information flow, where the diffusion rate accelerates more slowly at short horizons than it decelerates at long horizons. Bounded rationality is modelled by an endogenous trader confidence index which declines as stock price information becomes noisier, where lower confidence translates into lower trading volume and slower price accretion. Information diffusion slows and asymmetries are accentuated as traders lose confidence in information accuracy. Our empirical findings support the model's predictions of asymmetric momentum patterns and confidence effects.     

欧元对我国金融市场的影响分析

欧元从最初构想到进入正式流通历经坎坷,终于成功统一了欧洲多国的货币。在过去半个世纪中,国内、外学者提出并发展了关于最优货币区、国际货币体系改革和金融市场一体化等方面的多项理论,欧元的出现为这些理论提供了一个绝佳的验证机会。文章旨在研究欧元诞生后对国际金融市场以及对我国金融市场的影响。     

Corporate investment,dividend decisions,differential taxation and the no-arbitrage condition

Masulis and Trueman (1988) investigated corporate investment and dividend decisions under differential personal taxation. They assumed investors in different tax brackets, a state-preference complete market (which includes pure securities for each state) with a ban on short-selling. They concluded that shareholders prefer non-zero dividend payment. In their model, the restrictions on short-sales were needed to bound tax arbitrage profits, among investors in different tax brackets, so that equilibrium could be reached. However, the joint assumptions of complete markets, and restrictions on short-selling, are inconsistent. By utilizing more recent results, from the tax arbitrage literature, we allow short-selling, and examine the role and implications of the no-arbitrage condition. We show that, with investors in different tax brackets, equilibrium is feasible. We conclude that a revised Masulis and Trueman type model does not explain a non-zero optimal dividend policy.     

Assessing skewness in financial markets

It is a matter of common observation that investors value substantial gains but are averse to heavy losses. Obvious as it may sound, this translates into an interesting preference for right-skewed return distributions, whose right tails are heavier than their left tails. Skewness is thus not only a way to describe the shape of a distribution, but also a tool for risk measurement. We review the statistical literature on skewness and provide a comprehensive framework for its assessment. Then, we present a new measure of skewness, based on the decomposition of variance in its upward and downward components. We argue that this measure fills a gap in the literature and show in a simulation study that it strikes a good balance between robustness and sensitivity.     

Strategic behavior in financial markets

We describe a financial market as a noncooperative game in strategic form. Agents may borrow or deposit money at a central bank and use the cash available to them in order to purchase a commodity for immediate consumption. They derive positive utility from consumption and from having cash reserves at the end of the day, whereas being bankrupt entails negative utility. The bank fixes interest rates. The existence of Nash equilibria (both mixed and pure) of the ensuing game is proved under various assumptions. In particular, no agent is bankrupt at equilibrium. Asymptotic behavior of replica markets is discussed, and it is shown that given appropriate assumptions, the difference between a strategic player and a price taker is negligible in a large economy.     

Taxes and money in incomplete financial markets

Abstract We analyze a model with incomplete financial markets, where money is needed to pay taxes. Equilibria exist, are typically regular and not Pareto optimal. Moreover, generically, there exists a redistribution of money among households which leads to a Pareto superior equilibrium. The intervention occurs only in the first period and it does not require either closing markets or upper bounds on the number of households. Mathematics Subject Classification (2000): 91B50 Journal of Economic Literature Classification: D52, D60, E50, H20     

Firms,shareholders, and financial markets

We study the influence of the financial market on the decisions of firms in the real market. To that end, we present a model in which the shareholders’ portfolio selection of assets and the decisions of the publicly traded firms are integrated through the market process. Financial access alters the objective function of the firms, and the market interaction of shareholders substantially influences firms’ behavior in the real sector. After characterizing the unique equilibrium, we show that the financial sector integrates the preferences of all shareholders into the decisions for production and ownership structure. The participation from investors in the financial market also limits the firms’ ability to manipulate real prices, i.e., there is a loss of market power in the real sector. Note that, while the loss of market power changes expected profits, it is not detrimental to shareholders since the expected return of equity share depends on the variance (and not the mean) of profits. Indeed, any change in expected profits is absorbed by the financial price. We also show that financial access increases production, thereby altering the distribution of profits. In particular, financial access induces firms to take on more risk. Finally, financial access makes the relationship between risk-aversion and risk-taking ambiguous. For example, it is possible that an increase in risk-aversion leads to more risk-taking, i.e., the variance of real profits increases.     

Tying in two-sided markets with heterogeneous advertising revenues and negative pricing

We offer a theory of anticompetitive tying in two-sided markets when below-cost or negative pricing is possible. With the coexistence of two consumer groups (one regarding tying and tied goods as complementary and the other as independent), a tying-good monopolist may face difficulties in extracting rent under separate sales and wish to use tying to directly capture the large advertising revenue created in the complementary segment. We uncover two distinct mechanisms by which tying raises monopoly profits but reduces social welfare. Our theory of tying can be applied to real-world antitrust law enforcement, such as the Google Android case.     

The multifaceted impact of US trade policy on financial markets

We study the multifaceted effects of trade policy shocks on financial markets using a structural vector autoregression identified via event day heteroskedasticity. We find that restrictive US trade policy shocks affect US and international stock prices heterogeneously, but generally negatively. They increase market uncertainty, lower US interest rates, and lead to an appreciation of the US dollar. The effects are significant for several weeks or quarters. Decomposing the trade policy shocks further suggests that trade policy uncertainty dominates tariff level effects. Chinese trade policy shocks against the United States further hurt US stocks.     

Bid-ask dynamic pricing in financial markets with transaction costs and liquidity risk

According to the classic no arbitrage theory of asset pricing, in a frictionless market a No Free Lunch dynamic price process associated with any essentially bounded asset is a martingale under an equivalent probability measure. However, real financial markets are not frictionless. We introduce an axiomatic approach of Time Consistent Pricing Procedure (TCPP), in a model free setting, to assign to every financial position a dynamic ask (resp. bid) price process. Taking into account both transaction costs and liquidity risk this leads to the convexity (resp. concavity) of the ask (resp. bid) price. We prove that the No Free Lunch condition for a TCPP is equivalent to the existence of an equivalent probability measure R that transforms a process between the bid price process and the ask price process of every financial instrument into a martingale. Furthermore we prove that the ask (resp. bid) price process associated with every financial instrument is then a R super-martingale (resp. R sub-martingale) which has a càdlàg version.     

Global imbalances and dynamics of international financial markets

We provide an overview of the special issue “Global Imbalances and dynamics of international financial markets”. This special issue, which is associated with the 7th International Finance Conference, features research papers dealing with the impact of global imbalances, market complexity, and the impact of the recent global financial crisis on the conduct of monetary policies, financial market dynamics, financial stability, and risk management models.     

Arbitrage and price revelation with asymmetric information and incomplete markets

This paper deals with the issue of arbitrage with differential information and incomplete financial markets, with a focus on information that no-arbitrage asset prices can reveal. Time and uncertainty are represented by two periods and a finite set S of states of nature, one of which will prevail at the second period. Agents may operate limited financial transfers across periods and states via finitely many nominal assets. Each agent i has a private information about which state will prevail at the second period; this information is represented by a subset S_i of S. Agents receive no wrong information in the sense that the “true state” belongs to the “pooled information” set ∩_iS_i, hence assumed to be non-empty.Our analysis is two-fold. We first extend the classical symmetric information analysis to the asymmetric setting, via a concept of no-arbitrage price. Second, we study how such no-arbitrage prices convey information to agents in a decentralized way. The main difference between the symmetric and the asymmetric settings stems from the fact that a classical no-arbitrage asset price (common to every agent) always exists in the first case, but no longer in the asymmetric one, thus allowing arbitrage opportunities. This is the main reason why agents may need to refine their information up to an information structure which precludes arbitrage.     

Introduction to international financial markets and banking systems crises

This note introduces to the literature streams explored in the special section on international financial markets and banking systems crises. All topics tackled are related to the Great Recession. A brief overview of the research questions and related literatures is provided.     

Self-organization and the persistence of noise in financial markets

A dynamic model of financial markets with learning is demonstrated to produce a self-organized system that displays critical behavior. The price contains private information that traders learn to extract and employ to forecast future value. Since the price reflects the beliefs of the traders, the learning process is self-referencing. As the market learns to correctly extract information from the price, the market deemphasizes private information. Despite the convergence of the model towards the parameters producing efficiency, pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the model's own convergence.     

Existence of financial equilibria in continuous time with potentially complete markets

We prove that in smooth Markovian continuous-time economies with potentially complete asset markets, Radner equilibria with endogenously complete markets exist.     

Realized jumps on financial markets and predicting credit spreads

This paper extends the jump detection method based on bipower variation to identify realized jumps on financial markets and to estimate parametrically the jump intensity, mean, and variance. Finite sample evidence suggests that the jump parameters can be accurately estimated and that the statistical inferences are reliable under the assumption that jumps are rare and large. Applications to equity market, treasury bond, and exchange rate data reveal important differences in jump frequencies and volatilities across asset classes over time. For investment grade bond spread indices, the estimated jump volatility has more forecasting power than interest rate factors and volatility factors including option-implied volatility, with control for systematic risk factors. The jump volatility risk factor seems to capture the low frequency movements in credit spreads and comoves countercyclically with the price–dividend ratio and corporate default rate.     

A road to assimilation: immigrants and financial markets

This paper compares the financial market participation of immigrants and native-born Americans. Financial asset ownership is examined after controlling for the immigrants’ country of origin using a nationally representative National Longitudinal Survey (NLSY79) data set. The determinants of preference for financial asset ownership and the amount of financial equity held by households are estimated using a two-stage procedure. The results indicate that immigrants are less likely to own financial assets and more likely to have lower financial equity than native-born residents. Income uncertainty and risk tolerance of immigrants are associated with their preference for financial investments. Immigrants’ years of residence in the United States also increase their financial asset ownership. A discussion of the implications of these findings for policy makers, immigration researchers, and scholars of household savings behavior is also included.