Price Reaction to Momentum Trading and Market Equilibrium

This paper analyzes a nancial market with momentum trading, and shows how momentum trading a ects the market equilibrium. When momentum traders dominate the market, the private information owned by the rational traders may not be incorporated into the price, whence the price becomes less informative. If trend-chasing traders trade intensively in the market, a market bubble may occur and the price rises even though the fundamental value of the asset is low. It is shown that the reliability of the rm's public announcement such as an earnings forecast is a key factor to avert the market bubble

Insider Trading with Imperfectly Competitive Market Makers

We extend a market model of Kyle (1984) to a multi-period mar- ket model in which market makers are imperfectly competitive. When there are only a finite number of market makers who try to maximize their expected profits, Kyle's λ, price sensitivity to the order ow, is higher than that of Kyle (1985), who assumes perfect competition among risk-neutral market makers. We show that in a multi-period setting, the price movement has a negative serial correlation as Roll (1984) and Glosten and Milgrom (1985)

Price Formation in a Competitive Market When the Payoff of an Asset Depends on the Market Price

We consider a competitive market where the final payoff of a risky asset depends on the market price of the asset. It is shown that when the final payoff depends on the market price, there are multiple equilibria, and that even a small change of parameter setting may cause big price movements. It is also shown that, in contrast to Easley and O’Hara (2004), the shift of information from private to public may increase the required return of the risky asset

Insider trading with correlation between liquidity trading and a public signal

We analyse a Kyle-type continuous-time market model in which liquidity trading is correlated with a noisy public signal that is released continuously. We show that, in contrast to the previous literature, Kyle's λ, the price sensitivity to the order flow, can even be non-monotonic, depending on the correlation structure. We also show that the introduction of an additional public signal does not necessarily improve the informational efficiency of the market, depending on the correlation.Market microstructure, Financial economics, Market manipulation, Insider trading,

Leaders, followers, and equity risk premiums in booms and busts

We study an investment problem in which two asymmetric firms face competition and the regime characterizing the economic condition follows a Markov switching process. We derive the value functions and investment thresholds of the leader and follower. The option value of regime uncertainty is found to be quite important for the investment decision of firms. We also show the relationship between the equity risk premium and the economic cycle that has not been done in previous studies, which proxy economic conditions by the level of demand or other state variables

Competition and the Bad News Principle in a Real Options Framework

We study the investment timing problem where two firms that compete for investment preemption know in advance the time at which the economic condition changes. We show that the so-called Bad News Principle applies to the leader firm's investment decision near maturity in many cases. This result indicates that the option value to wait does have an impact even in a competitive situation, which is in contrast to the previous literature

Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees

In this study, we consider a one-period financial market with a monopolistic dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors' orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the marketclearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. Results show that proprietary trading increases both the trading volume and the transaction fee, and improves social welfare. Our study effectively demonstrates how proprietary trading affects market equilibrium and welfare of investors

Pricing of Discount Bonds with a Markov Switching Regime

We consider a Markov switching regime and price a discount bond using two popular models for the short rate, the Vasicek- and CIR-dynamics. In both cases, an explicit formula is obtained for the bond price which includes the solution of a matrix ODE. Our model is easy to calculate and captures the effect of regime uncertainty on the price and the term structure

Compensation measures for alliance formation: A real options analysis

This paper presents a real options model of alliance formation between two firms for entry into a new market. We analyze how different compensation measures affect the alliance timing and option values. Generally, when profit structures of the two firms before and after an alliance are different, their individually optimal alliance timings do not coincide. Therefore, achieving an agreement on a common alliance timing becomes an important issue. To promote alliance formation, we examine two feasible compensation measures provided by one firm to the other: share adjustment (flow compensation) and subsidy (lump-sum compensation). We find that subsidy induces an earlier alliance, although share adjustment is Pareto optimal in terms of the joint option value.Real options Alliance Flow payment Lump-sum payment

Regime uncertainty and optimal investment timing

We construct a real options model in which a regime change is expected at a pre-determined future time and study the effects of regime uncertainty on a firm's strategic investment decision, taking into consideration the remaining time to the regime change and the probability of each regime state. We show that just before the time of a regime change, firms should act as if the worst-case scenario was about to happen, even if a good state is highly possible.Investment timing Real options Policy change Regime uncertainty