Price Limits, Information Acquisition, and Bid–ask Spreads: Theory and Evidence

A number of futures markets use price limits which, in effect, preclude trade from occurring at prices outside certain exogenous bounds. Noting that such markets are characterized by heterogeneously informed traders, whereas previous work on price limits assumes symmetrically informed traders, we examine the effects of price limits in a setting where market participants are asymmetrically informed. We find that imposing price limits generally lowers the quality of information acquired in equilibrium, but lowers bid–ask spreads as well. Thus, depending on the relative weights placed by society on liquidity versus price efficiency, there may exist a set of price limits that are most efficient in achieving a trade-off between liquidity and informational efficiency. We perform empirical tests of some implications of the model using cross-sectional data on price limits. We find that price limits are strongly negatively related to both price volatility and trading volume. Though other explanations for our empirical findings cannot be ruled out, these results are not inconsistent with the model's implication that price limits should be tighter for contracts which offer greater profit potential for informed traders.     

Income diversification and risk: Does ownership matter? An empirical examination of Indian banks

We examine the impact of ownership on income diversification and risk for Indian banks over the period 2001–2009. We investigate both the determinants of non-interest income and the impact of diversification on various profitability and insolvency risk measures for public sector, private domestic, and foreign banks. We document that ownership does matter in the pursuit of non-interest income. Relative to private domestic banks, public sector banks earn significantly less fee-income, while foreign banks report higher fee income. Public sector banks with higher levels of governmental ownership are significantly less likely to pursue non-interest income sources. Fee-based income significantly reduces risk, measured by profitability variables, for public sector banks. Default risk is also reduced for these banks. From a regulatory perspective, it appears that diversification benefits India’s public sector banks. Our research has implications for the changes in the risk profile for banks in emerging banking markets pursuing non-interest revenue sources.     

Market Liquidity and Trading Activity

Previous studies of liquidity span short time periods and focus on the individual security. In contrast, we study aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activity and spreads. There are strong day-of-the-week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays display the opposite pattern. Long- and short-term interest rates influence liquidity. Depth and trading activity increase just prior to major macroeconomic announcements.