Do aggressive orders affect liquidity? An evidence from an emerging market

This paper investigates how aggressive orders affect spreads and trading activity measures on the stock market. Based on a sample of stocks listed on the Warsaw Stock Exchange this study finds that spreads and trading activity measures increase significantly when aggressive orders are executed, but quickly revert to initial levels. The reaction to these orders on the bid and ask side of the market is similar. The effect of aggressive orders differ depending on the size of the firms. Trading activity measures such as volumes or number of transactions increase stronger for bigger than for smaller stocks, while spreads increase more for smaller firms than for bigger ones. These findings enrich the understanding of liquidity dynamics especially on the emerging markets where liquidity is an important price formation factor.     

Liquidity in auction and specialist market structures: Evidence from the Italian bourse

Several studies find that bid-ask spreads for stocks listed on the NYSE are lower than for stocks listed on NASDAQ. While this suggests that specialist market structures provide greater liquidity than competing dealer markets, the nature of trading on the NYSE, which comprises a specialist competing with limit order flow, obfuscates the comparison. In 2001, a structural change was implemented on the Italian Bourse. Many stocks that traded in an auction market switched to a specialist market, where the specialist controls order flow. Results confirm that liquidity is significantly improved when stocks commence trading in the specialist market. Analysis of the components of the bid-ask spread reveal that the adverse selection component of the spread is significantly reduced. This evidence suggests that specialist market structures provide greater liquidity to market participants.     

Information Asymmetry Around Earnings Announcements

This study examines bid-ask spreads to determine how the anticipation and release of earnings announcements affect information asymmetry in the stock market. I use regression analysis and find that bid-ask spreads are negatively related to public information availability and positively related to earnings variability and the market reaction to prior unexpected earnings. The results suggest that firms for which earnings is expected to yield a relatively larger stock market reaction have greater information asymmetry than firms for which earnings are expected to yield a smaller market reaction.I also find that bid-ask spreads gradually increase in the four days prior to earnings announcements, and increase sharply the day prior to, the day of and the day after the earnings announcements. Bid-ask spreads seven to ten days after earnings announcements are not significantly different from bid-ask spreads seven to ten days prior to earnings announcements.     

Heterogeneous time varying transaction costs and asset pricing in international equity markets

In this paper, we examine the time variation in transaction costs relative to excess returns, in a panel consisting of 10 international equity indices over the time period 1984–2005. This is undertaken by extending the consumption CAPM (CCAPM) model proposed by Campbell and Shiller (Rev. Financ. Stud. 1:195–228, 1988) to incorporate time varying proportional transaction costs. We rigorously address both the cross-country heterogeneity in the estimated model and endogeneity. We find strong evidence that suggests transaction costs should be included as an additional explanatory variable in the CCAPM. This leads to the conclusion that transaction costs should be included in asset pricing models as their stochastic process impacts directly on private consumption expenditure.

Examining the relationship between earning management and market liquidity

The main purpose of this paper is to argue the extent that earnings management lowers liquidity. It should increase information asymmetry and impair trading liquidity. Using a sample of French firms from 2008 to 2011, we find that firms that manage earnings have wider bid-ask spreads. Our results are robust for both of two well-established measures of market liquidity. Therefore, the empirical results indicate that firms that exhibit greater earnings management are associated with lower market liquidity. These findings are in line with adverse selection and shed light on the role corporate governance devices can play in the consideration of shareholder interest’s protection, which leads to improved stock market liquidity levels.     

Individual stock-option prices and credit spreads

This paper introduces measures of volatility and jump risk that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain useful information for credit spreads and improve on historical volatilities when explaining the cross-sectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and (to a lesser extent) the implied-volatility skew matter for credit spreads. Detailed principal component analysis shows that a large part of the time-series variation in credit spreads can be explained in this way.     

Underlying assets for which options complete the market

This paper shows that investigations on the spanning power of options in spaces of integrable and continuously distributed payoffs can be conducted in the space of Lebesgue integrable claims on [0,1]. It is proved that there are infinite many underlying assets for which options span spaces of integrable claims. It is also shown that options on a single underlyer fail to complete the spaces of continuous contingent claims that are defined over a noncompact state-space.     

Market structure and dealers’ quoting behavior in the foreign exchange market

This article examines how differently the same dealer quotes in the inter-dealer and customer foreign exchange markets that have different market structures. The model first predicts that customer spreads are generally wider than inter-dealer ones due to less transparency in the customer market. The model also predicts that since customers are believed to be less informed than dealers, the differential between customer and inter-dealer spreads tends to fall with the rise in order sizes. In addition, the dealer's mid-quotes are shown to be the same in the two markets. Empirical evidence based on data collected from a FX dealer supports these theoretical findings.     

A unique view of hedge fund derivatives usage: Safeguard or speculation?

We study the common equity and equity option positions of hedge fund investment advisors over the 1999–2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.     

Hawkes model for price and trades high-frequency dynamics

We introduce a multivariate Hawkes process that accounts for the dynamics of market prices through the impact of market order arrivals at microstructural level. Our model is a point process mainly characterized by four kernels associated with, respectively, the trade arrival self-excitation, the price changes mean reversion, the impact of trade arrivals on price variations and the feedback of price changes on trading activity. It allows one to account for both stylized facts of market price microstructure (including random time arrival of price moves, discrete price grid, high-frequency mean reversion, correlation functions behaviour at various time scales) and the stylized facts of market impact (mainly the concave-square-root-like/relaxation characteristic shape of the market impact of a meta-order). Moreover, it allows one to estimate the entire market impact profile from anonymous market data. We show that these kernels can be empirically estimated from the empirical conditional mean intensities. We provide numerical examples, application to real data and comparisons to former approaches.     

Evidence on the arbitrage efficiency of SPI index futures and options markets

This paper is concerned with arbitrage opportunities in the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. Tick-by-tick transaction price data are employed so that the futures contracts, the call futures options and the put futures options can be matched within a one-minute interval. This paper also takes into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. A thorough ex post analysis is first carried out. The results reveal a significant number of violations of the PCFP in the sample. Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched trios of futures, put and call contracts, are executed with lags up to 3 min. The ex ante results are similar to the ex post results. However, further analysis reveals that the exploitability of the identified arbitrage opportunities is very limited due to the small trading volumes of the futures and options contracts. Thus, we conclude that there is no strong evidence against the arbitrage efficiency between the SPI index futures and options markets in Australia.      

论政府干预市场和管制价格的边界——一则“观众诉影院侵犯选择权案”的经济学阐释

消费者投诉商家\"侵犯其选择权\"等诸如此类的问题,反映了消费者对政府干预的期盼,直接表现为对政府管制市场价格的渴望.理论分析表明,政府以提供\"禁止\"之类\"有益品\"(merit goods)的方式来纠正人们不舍理的偏好进而解决市场失灵问题,是市场经济条件下政府的重要职能之一.商家的行规戒律并非\"不含理偏好\",不属于政府干预或管制的范围.因此,发展市场经济应该更多地让价格发挥配置资源的作用;政府的价格管制边界应严格限定在市场失灵领域,如对垄断企业的价格及非垄断企业的卡特尔定价行为等进行管制.     

Put-call parity revisited: intradaily tests in the foreign currency options market

We test exchange-traded (PHLX) German mark options for conformance to put-call parity (PCP). Puts and calls are matched to the nearest minute, and the relative impact of competing spot exchange rate sources (Reuters vs. Telerate) is assessed. We find that PCP usually holds (roughly 96% of put-call pairs), with the exception of a notable incident in the European options pits. In those instances in which PCP is violated, we find sharp intradaily and intraweekly seasonalities for American options, with disproportionate PCP violations occurring during the relatively light trading periods in early evening and on Fridays. We also conclude that the Telerate prices as recorded by the PHLX are not as accurate as the Reuters exchange rates provided by Olsen and Associates, probably because of time lags in the Telerate data.     

Determinants of the components of bid-ask spreads on stocks

In this paper we show that George et al. (GKN, 1991) estimators of the adverse selection and order processing cost components of the bid-ask spread are biased due to intertemporal variations in the bid-ask spread. We use alternative estimators that correct this bias and that are applicable to individual securities, and estimate these cost components empirically using data on NYSE/AMEX stocks. As expected, our results indicate that on average adverse selection costs account for approximately 50% of the bid-ask spread, sharply higher than the estimates of 8-10% obtained by GKN for NASDAQ stocks and 21% that we obtain for NYSE/AMEX stocks using GKN's estimators. We then conduct cross-sectional regressions designed primarily to determine whether adverse selection costs vary across specialists after controlling for firm size and other factors. Consistent with previously established hypotheses, we find that adverse-selection costs vary across specialists, and that this variation is related to the number of securities that the specialist handles.     

Is competition beneficial? The case of exchange traded funds

New ETF creation has surged in recent years, giving investors the option to choose from a wide range of similar ETFs within each group of competitors. We identify groups of ETFs that can be considered direct competitors and examine the impact of competition on their market quality. Results show improved market quality measures when competition increases. A change equivalent to going from a monopoly to a highly competitive market results in a 29% decrease in bid–ask spreads, a 72% decrease in illiquidity, and a 52% increase in turnover. However, we find that competition has a differential impact on ETFs according to their market depth. Market quality improves with competition for large or well-performing ETFs, while it worsens for small or under-performing ETFs. A case study on ETFs banned by the SEC in March 2010 further highlights our results in the artificially controlled competitive environment of the moratorium.