Elements of Effective Insider Trading Laws

While countries have been more than willing to regulate insider trading it is an open question as to whether this has resulted in improvements for those markets. In particular lawmakers have had to largely structure the legal regimes with little guidance as to what makes an effective insider trading law. We seek to address this by examining the aspects of a legal regime that result in reductions in information trading and trading costs. Employing a sample of 18 countries we compare specific and quantifiable aspects of the legal regime with the measures of transactions costs in a sample of up to 70 randomly selected companies per market. We find that stronger laws result in reductions in the cost of informed trading. Particularly we find that broader laws laws that employ financial rather than criminal damages and laws that are enforced by strong public regulators perform best. These results should help to enlighten regulator attempts to create strong and effective insider trading law

Speed, Algorithmic Trading, and Market Quality around Macroeconomic News Announcements

This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook)

Absence of Speculation in the European Sovereign Debt Markets

European sovereign debt markets have been under scrutiny since the sovereign debt crisis of 2009. In this paper, we study to what extent the extreme dynamics were driven by fundamentals or speculation. We do so by decomposing bond and CDS spreads into fundamental and non-fundamental parts using a heterogeneous agent model. We find that bond markets are driven for 80% by liquidity trading, 13% by credit news, and only 5.4% by speculation. The CDS market is for 49% driven by credit news, 45% liquidity trading, and 5.5% speculation. The relative importance of the different types of agents varies over time, though

Time-varying arbitrage and dynamic price discovery

We introduce time-varying measures of price discovery based on underlying profit maximizing behavior by combining the heterogeneous agent modelling literature with the market microstructure literature. We set up a heterogeneous agent model with arbitrageurs and trend chasers (chartists), and allow agents to switch between the strategies conditional on recent forecasting performance. Estimation of the model on Canadian-US cross-listed stocks on high-frequency data shows that there is significant heterogeneity and switching, causing ample variation in the information processing capacity of markets

Kiwisaver, who is really reaping the benefits?

New Zealand KiwiSaver fund industry enjoys a near monopoly situation, with no exposureto international competition. Annual fees that KiwiSaver funds charge New Zealanders(which are now close to $350 million p.a.) are far above international standards and notjustifiable given their relatively poor performance since inception. We believe that allowingself-managed retirement portfolio investments by employees, expanding the menu ofinvestment choices including low cost international ETFs, and opening the industry tointernational competition will be beneficial for individual investors and the country as whole

The Skewness of Commodity Futures Returns

This article studies the relation between the skewness of commodity futures returns and expected returns. A trading strategy that takes long positions in commodity futures with the most negative skew and shorts those with the most positive skew generates significant excess returns that remain after controlling for exposure to well-known risk factors. A tradeable skewness factor explains the cross-section of commodity futures returns beyond exposures to standard risk premia. The impact that skewness has on future returns is explained by investors’ preferences for skewness under cumulative prospect theory and selective hedging practices

Understanding Causality: What came first the Chicken or the Egg?

The question of association as opposed to causation is an important issue in many scientific fields, including finance. Much of the empirical research in finance deals with the question of causality or stated differently what came first: the chicken or the egg. We are interested, for example, to know the transmission channels through which shocks propagate themselves in financial markets (e.g., how volatility shocks in one stock market affect other markets); or to build superior forecasting models to find out price leadership among similar financial assets traded on different markets (e.g. is it the shares listed on the home market or the host market of a cross-listed firm that first reacts to a corporate event). Hence, being able to correctly infer the direction of causality among financial assets is crucial for accurately understanding relations among those assets. While in practice we can easily observe correlations among financial assets or markets, detecting causal relationship (in other words, who moves first and who reacts) is often not an easy tas