New Economics Papers
on Market Microstructure
Issue of 2007‒12‒01
six papers chosen by
Thanos Verousis

  1. The Effect of Bid-Ask Prices on Brazilian Options Implied Volatility: A Case Study of Telemar Call Options By Claudio Henrique da Silveira Barbedo; Eduardo Facó Lemgruber
  2. Macro news, risk-free rates, and the intermediary: customer orders for thirty-year Treasury futures By Albert J. Menkveld; Asani Sarkar; Michel van der Wel
  3. Informed Trading, Liquidity Provision, and Stock Selection by Mutual Funds By Zhi Da; Pengjie Gao; Ravi Jagannathan
  4. Information-based trade By Philip Bond; Hulya Eraslan
  5. An experimental study of trading volume and divergence of expectations in relation to earnings announcement By Thanh Huong Dinh; Jean-François Gajewski
  6. Advance Information and Asset Prices By Albuquerque, Rui; Miao, Jianjun

  1. By: Claudio Henrique da Silveira Barbedo; Eduardo Facó Lemgruber
    Abstract: Although not explicitly reported, option traders on the Bovespa exchange pay an implicit bid-ask spread on each trade. Reported transaction prices that comprise the databases previously used to study the Brazilian options markets do not reflect actual option values at the time of the trades, but actual values plus (for purchases) or minus (for sales) the bid-ask spread. We use a chooser American option model to estimate Telemar call options bid-ask spreads, and to create a database of spread-adjusted trade prices. We find that the bid-ask spreads explain several previously reported puzzles regarding asset price volatility.
    Date: 2007–10
  2. By: Albert J. Menkveld; Asani Sarkar; Michel van der Wel
    Abstract: Customer order flow correlates with permanent price changes in equity and non-equity markets. We examine macro news events in the thirty-year Treasury futures market to identify causality from customer flow to risk-free rates. We remove the positive feedback trading effect and establish that, in the fifteen minutes subsequent to the news, intermediaries rely on customer orders to determine a substantial part of the announcement’s effect on risk-free rates—about one-third relative to the instantaneous effect. Intermediaries appear to benefit from privately observing informed customers, since their own-account trade profitability correlates with access to customer flow, controlling for volatility, competition, and the macro “surprise.”
    Keywords: Futures ; Treasury bonds ; Intermediation (Finance) ; Macroeconomics ; Financial markets ; Stock - Prices
    Date: 2007
  3. By: Zhi Da; Pengjie Gao; Ravi Jagannathan
    Abstract: We show that the stock selection ability of a fund manager can be decomposed into two components: "informed trading" and "liquidity provision." As information loses value over time, informed trading tends to be liquidity-absorbing. We conjecture that value enhancing informed trading is more likely in stocks during times when they are associated with more information events. In contrast, liquidity provision is more likely to add value for stocks associated with few information events and little adverse selection risk. We identify times when there are more information events associated with a stock by its Probability of Informed Trading (PIN, Easley et. al., 1996) measure and information asymmetry component of the spread (Madhavan et. al., 1997). We provide empirical support for our conjecture using quarterly mutual fund holdings data for the period from 1983 to 2004. We find that the informed trading component is relatively more important for mutual funds with a growth oriented investment style whereas liquidity provision is more important for funds with more of an income orientation. Further, the informed trading component of the selection ability of a mutual fund exhibits greater persistence over time.
    JEL: G1 G11 G12 G14 G23
    Date: 2007–11
  4. By: Philip Bond; Hulya Eraslan
    Date: 2007–11–19
  5. By: Thanh Huong Dinh; Jean-François Gajewski
    Abstract: The objective is to study from an experimental point of view investors’ reactions to the announcement of annual earnings in terms of trading volume. Annual net income is seen by shareholders as the most important figure, since it is, for individual accounts, the basis for determining profit by the shareholders’ general meeting. In the experiment, this is announced at the end of eight rounds of exchange. Every two periods, a fraction of the annual income is revealed to all the participants. Thus they periodically revise their expectations as to the annual results. The experiment shows that the divergence of expectations does not decrease when investors have more information about the final results. This is the main explanation for transactions in our experimental asset markets. However, too large a divergence prevents investors from trading. As expected, price changes in absolute value influence trading volume. But this effect is smaller than the impact of heterogeneity of expectations. <P>L’objectif de cette étude est d’observer, d’un point de vue expérimental, la réaction des investisseurs lors de la diffusion des bénéfices annuels d’une entreprise en termes de volume de transactions. Le revenu net annuel est perçu par les actionnaires comme l’indice le plus important, étant responsable de la détermination des gains individuels à l’assemblée des actionnaires. Au cours de l’expérience, cet indice est annoncé après huit rondes d’échanges. Une fraction du revenu annuel est annoncé à tous les participants une période sur deux. Ainsi, les participants révisent périodiquement leurs attentes face aux résultats annuels. L’expérience démontre que la divergence des attentes ne diminue pas lorsque les investisseurs possèdent plus d’information sur les résultats finaux. C’est ce qui explique principalement les transactions obtenues dans notre marché d’actifs expérimental. Cependant, une divergence trop importante empêche les investisseurs d’effectuer des transactions. Comme prévu, les changements de prix en valeur absolue influencent le volume de transactions. Cette conséquence est toutefois moins importante que l’impact de l’hétérogénéité des attentes.
    Keywords: trading volume, heterogeneity of expectations, earnings announcement and experimental asset markets, volume de transactions, hétérogénéité des attentes, annonce des bénéfices, marchés d’actifs expérimentaux
    JEL: C91 D84
    Date: 2007–11–01
  6. By: Albuquerque, Rui; Miao, Jianjun
    Abstract: This paper provides an explanation for momentum and reversal in stock returns within a rational expectations framework in which investors are heterogeneous in their information and investment opportunities. We assume that informed agents privately receive advance information about company earnings that materializes into the future. While this information is immediately incorporated into prices, stock prices underreact to it causing short-run momentum. Stock prices may appear to move in ways unrelated to current fundamentals. When the information materializes, the stock price reverts back to its long run mean mimicking an overreaction pattern.
    Keywords: advance information; momentum and reversal effects; overreaction; rational expectations equilibrium; underreaction
    JEL: G11 G12 G14
    Date: 2007–11

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