Strategic Investor Behaviour and the Volume-Volatility Relation in Equity Markets

We examine the volume-volatility relation using detailed data from a limit order driven equity market. Estimates of the intraday slope of the demand and supply schedules of the order book are found to capture regularities in spreads, trade size and submission strategies which are believed to be related to asymmetric information. On a daily level, the order book slope should also captures differences in dispersion of beliefs about stock values. The relationship between our daily slope measure and the contemporaneous volatility across companies and time supports models where strategic trading and dispersion of beliefs increase both volume and volatility.Market Microstructure; Volume-volatility relation; Equity trading; Asymmetric Information

Interaction model for magnetic holes in a ferrofluid layer

Nonmagnetic spheres confined in a ferrofluid layer (magnetic holes) present dipolar interactions when an external magnetic field is exerted. The interaction potential of a microsphere pair is derived analytically, with a precise care for the boundary conditions along the glass plates confining the system. Considering external fields consisting of a constant normal component and a high frequency rotating in-plane component, this interaction potential is averaged over time to exhibit the average interparticular forces acting when the imposed frequency exceeds the inverse of the viscous relaxation time of the system. The existence of an equilibrium configuration without contact between the particles is demonstrated for a whole range of exciting fields, and the equilibrium separation distance depending on the structure of the external field is established. The stability of the system under out-of-plane buckling is also studied. The dynamics of such a particle pair is simulated and validated by experiments.Comment: 15 pages, 11 figures (18 with subfigures). to appear in Phys. Rev.

Why do firms pay for liquidity provision in limit order markets?

In recent years, a number of electronic limit order have reintroduced market makers for some securities (Designated Market Makers). This trend has mainly been initiated by financial intermediaries and listed firms themselves, without any regulatory pressure. In this paper we ask why firms are willing to pay to improve the secondary market liquidity of its shares. We show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares. We also find some evidence of agency costs, managers desiring good liquidity when they plan insider trades.Market microstructure; Corporate Finance; Designated Market Makers; Insider Trading

The ownership structure of repurchasing firms

This paper provides an examination of the ownership structure in Norwegian firms that announced repurchase plans during the period 1999 through 2001, as well as for groups of these firms conditional on whether they actually executed repurchases or not. By using detailed information on various ownership variables that can be related to corporate governance mechanisms, the paper also examines whether the propensity for firms to announce a repurchase program depends on the ownership composition. Some interesting patterns are found which are consistent with models where firms with potentially the highest agency problems use repurchases to mitigate agency costs. However, a high insider ownership in these firms may also suggest that asymmetric information, shareholder expropriation and entrenchment may also be motivations for why firms repurchase shares.Stock repurchases, ownership structure, corporate governance

The Risk Components of Liquidity

Does liquidity risk differ depending on our choice of liquidity proxy? Unlike literature that considers common liquidity variation, we focus on identifying different components of liquidity, statistically and economically, using more than a decade of US transaction data. We identify three main statistical liquidity factors which are utilized in a linear asset pricing framework. We motivate a correspondence of the statistical factors to traditional dimensions of liquidity as well as the notion of order and trade based liquidity measures. We find evidence of multiple liquidity risk premia, but only a subset of the financial liquidity factors are associated with significant risk premia. These are the factors that we relate to the dimensions of immediacy and resilliency, while the depth dimension does not command a risk premium in any of the models. Our results suggests caution when choosing liquidity variables in asset pricing applications, since liquidity premia may be reflected in only some dimensions of liquidity.Liquidity Risk; Liquidity Factors; Asset Pricing; Market Microstructure

Throttling hyperactive robots – order-to-trade ratios at the Oslo Stock Exchange

This version is made available in accordance with publisher policies. It is the author’s last version of the article after peer-review, usually referred to as postprint or accepted version. Please cite only the published version.We investigate the effects of introducing a fee on excessive order-to-trade ratios (OTRs) on market quality at the Oslo Stock Exchange (OSE). We find that traders reacted to the regulation as measured OTRs fell. However, market quality, measured with depth, spreads, and realized volatility, remain largely unaffected. This result differs sharply from the experience in other markets, such as Italy and Canada, where similar regulatory changes have been accompanied by a worsening of liquidity. The unchanged market quality at the OSE is likely due to the different design of the regulation, which is tailored to encourage liquidity supply.acceptedVersio

Spiral cracks in drying precipitates

We investigate the formation of spiral crack patterns during the desiccation of thin layers of precipitates in contact with a substrate. This symmetry-breaking fracturing mode is found to arise naturally not from torsion forces, but from a propagating stress front induced by the fold-up of the fragments. We model their formation mechanism using a coarse-grain model for fragmentation and successfully reproduce the spiral cracks. Fittings of experimental and simulation data show that the spirals are logarithmic, corresponding to constant deviation from a circular crack path. Theoretical aspects of the logarithmic spirals are discussed. In particular we show that this occurs generally when the crack speed is proportional to the propagating speed of stress front.Comment: 4 pages, 5 figures, RevTe

Structure formation in binary colloids

A theoretical study of the structure formation observed very recently [Phys. Rev. Lett. 90, 128303 (2003)] in binary colloids is presented. In our model solely the dipole-dipole interaction of the particles is considered, electrohidrodynamic effects are excluded. Based on molecular dynamics simulations and analytic calculations we show that the total concentration of the particles, the relative concentration and the relative dipole moment of the components determine the structure of the colloid. At low concentrations the kinetic aggregation of particles results in fractal structures which show a crossover behavior when increasing the concentration. At high concentration various lattice structures are obtained in a good agreement with experiments.Comment: revtex, 4 pages, figures available from authors due to size problem

Pattern formation and selection in quasi-static fracture

Fracture in quasi-statically driven systems is studied by means of a discrete spring-block model. Developed from close comparison with desiccation experiments, it describes crack formation induced by friction on a substrate. The model produces cellular, hierarchical patterns of cracks, characterized by a mean fragment size linear in the layer thickness, in agreement with experiments. The selection of a stationary fragment size is explained by exploiting the correlations prior to cracking. A scaling behavior associated with the thickness and substrate coupling, derived and confirmed by simulations, suggests why patterns have similar morphology despite their disparity in scales.Comment: 4 pages, RevTeX, two-column, 5 PS figures include

Wave Number of Maximal Growth in Viscous Magnetic Fluids of Arbitrary Depth

An analytical method within the frame of linear stability theory is presented for the normal field instability in magnetic fluids. It allows to calculate the maximal growth rate and the corresponding wave number for any combination of thickness and viscosity of the fluid. Applying this method to magnetic fluids of finite depth, these results are quantitatively compared to the wave number of the transient pattern observed experimentally after a jump--like increase of the field. The wave number grows linearly with increasing induction where the theoretical and the experimental data agree well. Thereby a long-standing controversy about the behaviour of the wave number above the critical magnetic field is tackled.Comment: 19 pages, 15 figures, RevTex; revised version with a new figure and references added. submitted to Phys Rev