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on Market Microstructure |
| By: | Giovanni Cespa (Cass Business School, CSEF, and CEPR); Thierry Focault (HEC, School of Management, Paris, GREGHEC, and CEPR) |
| Abstract: | We describe a new mechanism that explains the transmission of liquidity shocks from one security to another (“liquidity spillovers”). Dealers use prices of other securities as a source of information. As prices of less liquid securities convey less precise information, a drop in liquidity for one security raises the uncertainty for dealers in other securities, thereby affecting their liquidity. The direction of liquidity spillovers is positive if the fraction of dealers with price information on other securities is high enough. Otherwise liquidity spillovers can be negative. For some parameters, the value of price information increases with the number of dealers obtaining this information. In this case, related securities can appear segmented, even if the cost of price information is small. |
| Keywords: | Liquidity spillovers, Liquidity Risk, Contagion, Value of price information, Transparency, Colocation |
| JEL: | G10 G12 G14 |
| Date: | 2011–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:284&r=mst |
| By: | G. William Schwert |
| Abstract: | This paper uses monthly returns from 1802-2010, daily returns from 1885-2010, and intraday returns from 1982-2010 in the United States to show how stock volatility has changed over time. It also uses various measures of volatility implied by option prices to infer what the market was expecting to happen in the months following the financial crisis in late 2008. This episode was associated with historically high levels of stock market volatility, particularly among financial sector stocks, but the market did not expect volatility to remain high for long and it did not. This is in sharp contrast to the prolonged periods of high volatility during the Great Depression. Similar analysis of stock volatility in the United Kingdom and Japan reinforces the notion that the volatility seen in the 2008 crisis was relatively short-lived. While there is a link between stock volatility and real economic activity, such as unemployment rates, it can be misleading. |
| JEL: | G11 G12 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16976&r=mst |
| By: | Shachat, Jason; Srivinasan, Anand |
| Abstract: | We report on experimental markets for a contingent claim asset that eight subjects traded for nine periods before the state was revealed. There is an informative binary signal that arrives after each of the first eight trading rounds. In our baseline treatment the realization of the signal is public information, and in another treatment, market participants are randomly sequenced and receive the signal as private information. In the latter case, we observe zero information aggregation and prices lock in on home grown norms, which we call informational price cascades. We test the fragility of the price cascades in two further treatments. First, we break the monopoly on each signal by revealing it to two subjects, and then we increase that number to four. It is only when we inform four participants, or one-half of the market, that cascades fail to form and information starts to aggregate in the market. |
| Keywords: | Information cascade; information aggregation; experiment; asset market |
| JEL: | G12 C92 D82 |
| Date: | 2011–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30308&r=mst |