New Economics Papers
on Financial Markets
Issue of 2008‒05‒10
six papers chosen by

  1. Monte Carlo Simulation in the Pricing of Derivatives By Cara Marshall
  2. Volatility-price relationships in power exchanges: A demand-supply analysis By Sandro Sapio
  3. Insiders-Outsiders, Transparency and the Value of the Ticker By Giovanni Cespa; Thierry Foucault
  4. Efficient Market Hypothesis in European Stock Markets By Maria Rosa Borges
  5. Tick Size Change on the Stock Exchange of Thailand By Pantisa Pavabutra; Sukanya Prangwattananon
  6. High and Volatile Treasury Yields in Tanzania:The Role of Strategic Bidding and Auction Microstructure By S. M. Ali Abbas; Yuri Vladimirovich Sobolev

  1. By: Cara Marshall (Fordham University, Department of Economics)
    Abstract: No abstract information.
    Date: 2008
  2. By: Sandro Sapio
    Abstract: The evidence of volatility-price dependence observed in previous works (Karakatsani and Bunn 2004; Bottazzi, Sapio and Secchi 2005; Simonsen 2005) suggests that there is more to volatility than simply spikes. Volatility is found to be positively correlated with the lagged price level in settings where market power is likely to be particularly strong (UK on-peak sessions, the CalPX). Negative correlation is instead observed in markets considered to be fairly competitive, such as the NordPool. Prompted by these observations, this paper aims to understand whether volatility-price patterns can be mapped into different degrees of market competition, as the evidence seems to suggest. Price fluctuations are modelled as outcomes of dynamics in both sides of the market - demand and supply, which in turn respond to shocks to the underlying preference and technology fundamentals. Negative volatility-price dependence arises if the market dynamics is accounted for by common shocks which affect valuations uniformly. Positive dependence is related to the impact of asymmetric shocks. The paper shows that under certain conditions, these volatility-price patterns can be used to identify the exercise of market power. Identification is however ruled out if all shocks affect valuations uniformly.
    Keywords: Electricity, Market, Volatility, Supply Curve, Demand Curve, Fundamentals, Shocks
    Date: 2008–04–11
  3. By: Giovanni Cespa (Queen Mary, University of London, CSEF-Università di Salerno, and CEPR); Thierry Foucault (HEC, Paris, GREGHEC, and CEPR)
    Abstract: We consider a multi-period rational expectations model in which risk-averse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative externality on other investors. Thus, investors' average welfare is maximal when access to price information is rationed. We show that a market for price information can implement the fraction of insiders that maximizes investors' average welfare. This market features a high price to curb excessive acquisition of ticker information.We also show that informational efficiency is greater when the dissemination of ticker information is broader and more timely.
    Keywords: Market data sales, Latency, Transparency, Price discovery, Hirshleifer effect
    JEL: G10 G12 G14
    Date: 2008–04
  4. By: Maria Rosa Borges
    Abstract: This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of France, Germany, UK, Greece, Portugal and Spain, from January 1993 to December 2007. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. The tests are performed using daily and monthly data for the whole period and for the period of the last five years, i.e., 2003 to 2007. Overall, we find convincing evidence that monthly prices and returns follow random walks in all six countries. Daily returns are not normally distributed, because they are negatively skewed and leptokurtic. France, Germany, UK and Spain meet most of the criteria for a random walk behavior with daily data, but that hypothesis is rejected for Greece and Portugal, due to serial positive correlation. However, the empirical tests show that these two countries have also been approaching a random walk behavior after 2003.
    JEL: G14 G15
    Date: 2008–04
  5. By: Pantisa Pavabutra; Sukanya Prangwattananon
    Abstract: This paper explores the impact of exogenous tick size reduction on bid-ask spreads, depths, and trading volume on the Stock Exchange of Thailand (SET). On November 5, 2001, the SET implemented tick size reduction on stocks below THB 25. Even though trading on the Thai Exchange is largely dominated by retail investors, the tick reduction produces similar empirical results found in markets where institutional investors are more dominant. Tick reduction on the SET is associated with declines in spreads, quoted and accumulated market depths. The study finds no significant change in trading volume of the affected stock group.
    Keywords: Tick size, Market microstructure, Transaction costs
    JEL: G14 G18
    Date: 2008–01
  6. By: S. M. Ali Abbas; Yuri Vladimirovich Sobolev
    Abstract: The observed increase in the level and volatility of Tanzania's Treasury yields in recent years against an otherwise benign macroeconomic backdrop presented a puzzle for policymakers, while raising concerns about the fiscal burden of rising debt interest payments and diversion of bank credit away from the private sector. Using evidence from bid-level data and supported by theoretical models, this paper argues that oligopolistic bidding through 2005 may have been partly responsible for the rising level of yields; while the high volatility during 2006-07 could be traced to the emergence of a sharp segmentation of the T-bill market between sophisticated financial market players (foreign-controlled banks) and a lessexperienced group of investors (domestic pension funds and small banks). An important policy recommendation that emerges is that public debt managers should avoid micromanaging Treasury bill auctions by issuing amounts in excess of those offered or by dipping into oversubscribed segments of the yield curve, as such practices seriously disadvantage the less-sophisticated (but more competitive) investors vis-à-vis the more sophisticated players.
    Date: 2008–03–31

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