New Economics Papers
on Market Microstructure
Issue of 2008‒05‒10
five papers chosen by
Thanos Verousis

  1. Tick Size Change on the Stock Exchange of Thailand By Pantisa Pavabutra; Sukanya Prangwattananon
  2. Insiders-Outsiders, Transparency and the Value of the Ticker By Giovanni Cespa; Thierry Foucault
  3. Data Delays, Index Deletions, Prepayments, and Defaults By Rosenthal, Dale W.R.
  4. Board Structure and Price Informativeness By Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo
  5. 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: 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
  2. 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
  3. By: Rosenthal, Dale W.R.
    Abstract: High-frequency traders and microstructure researchers must account for delays in published information; index and ``index plus'' fund managers pay liquidity costs when indices change; and, debt markets quote weighted-average metrics for loan portfolios and are concerned with prepayments and defaults. I consider statistical models for data delays; and, I propose metrics for similar waiting time risks: index-deletion, prepayment, and default. Using standard assumptions, these all may be nearly gamma-distributed. Small-sample density approximations are shown to be consistent under mild conditions. Finally, I discover an improved version of a metric currently used in rating CDOs.
    JEL: C46 G33 G0
    Date: 2008–01–22
  4. By: Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo
    Abstract: We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model’s predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring.
    Keywords: Corporate boards, Independent directors, Price informativeness
    JEL: G32 G34
    Date: 2008–02
  5. 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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