Crossing Networks and Dealer Markets: Competition and Performance

This paper studies the interaction between dealer markets and a relatively new form of exchange, passive crossing networks, where buyers and sellers trade directly with one another. We find that the crossing network is characterized by both positive ('liquidity') and negative ('crowding') externalities, and we analyze the effects of its introduction on the dealer market. Traders who use the dealer market as a 'market of last resort' can induce dealers to widen their spread and can lead to more efficient subsequent prices, but traders who only use the crossing network can provide a counterbalancing effect by reducing adverse selection and inventory holding costs.     

Possible explanations of no-synergy mergers and small firm effect by the Generalized Capital Asset Pricing Model

The Sharpe-Lintner Capital Asset Pricing Model (CAPM) and the General Capital Asset Pricing Model (GCAPM) suggested by Levy (1978), Merton (1987), and Markowitz (1989) are compared and analyzed. Under the GCAPM we obtain the following main results: 1) the value additivity principle breaks down, which explains mergers and acquisitions; 2) beyond a certain limit, the profit from additional merger is negative; and 3) in a GCAPM equilibrium, small firms earn an abnormal profit in comparison to what is predicted by the CAPM. These results, which are indeed observed in the market, are fully consistent with the GCAPM, but are in contradiction to the CAPM.     

A NOTE ON THE GENERALIZED MULTIBETA CAPM

The unified beta theory of Connor (1984) requires that the market portfolio be well diversified in a given factor structure. Wei (1988) extended Connor's results without relying on this assumption. This note provides an alternative to Wei's result by assuming that residuals from the projection of asset return on a set of k factors follow a joint elliptical distribution.