New Economics Papers
on Financial Markets
Issue of 2012‒01‒03
five papers chosen by

  1. Measuring market liquidity: An introductory survey By A. Gabrielsen; M. Marzo; P. Zagaglia
  2. Asset Bubbles, Credit Market Imperfections, and Technology Choice By Akihisa Shibata; Tarishi Matsuoka
  3. Financial Systemic Risk: Taxation or Regulation? By Donato Masciandaro, Francesco Passarelli
  4. Sunshine trading: Flashes of trading intent at the NASDAQ By Johannes A. Skjeltorp; Elvira Sojli; Wing Wah Tham
  5. Vertical linkage between formal and informal credit markets: corruption and credit subsidy policy By Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu

  1. By: A. Gabrielsen; M. Marzo; P. Zagaglia
    Abstract: Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.
    JEL: G1 G10 G12
    Date: 2011–12
  2. By: Akihisa Shibata (Institute of Economic Research, Kyoto University); Tarishi Matsuoka (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)
    Abstract: This paper introduces a bubbly asset into the Matsuyama (2007) model with credit market imperfections and multiple technologies and shows that there can exist multiple bubbly steady states and bubbles may cause underdevelopment traps by preventing the adoption of high productivity technology.
    Keywords: asset bubbles; credit market imperfections; technology adoption
    JEL: E44
    Date: 2011–12
  3. By: Donato Masciandaro, Francesco Passarelli
    Abstract: In this paper we describe systemic financial risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either with financial regulation or taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is more frequently adopted. In this paper we make a positive, politico-economic argument. If the majority chooses a tax, then it is likely to be too low. If it chooses regulation it will possibly be too harsh. Moreover, a majority of low polluting portfolio owners may strategically use regulation in order to charge the minority a larger share of the externality reduction.
    Keywords: financial crises, banking regulation, financial transaction taxes
    JEL: D62 D72 G21
    Date: 2011–12
  4. By: Johannes A. Skjeltorp (Norges Bank (Central Bank of Norway)); Elvira Sojli (Erasmus University and Duisenberg School of Finance); Wing Wah Tham (Erasmus University)
    Abstract: We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from Nasdaq as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in Nasdaq. In addition overall market quality improves substantially when the flash functionality is introduced and deteriorates when it is removed.
    Keywords: Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading; Market quality; Market transparency; Sunshine trading
    JEL: G10 G20 G14
    Date: 2011–12–15
  5. By: Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu
    Abstract: We develop a model of vertical linkage between the formal and informal credit markets which highlights the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit, it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. However, an anticorruption measure (increase in penalty) unambiguously lowers the interest rate in the informal credit market. Finally, we examine the effects of alternative policies on the incomes of different economic agents in our model.
    Keywords: Formal/informal credit markets; informal interest rate; corruption; credit subsidy policy
    JEL: L13 O17 O16
    Date: 2011–12–15

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