Price Discovery in the Foreign Currency Futures and Spot Market

In this paper, we compare price discovery in the foreign exchange futures and spot markets during a period in which the spot market was less transparent but had higher volume than the futures market. We develop a foreign exchange futures order flow measure that is a proxy for the order flow observed by Chicago Mercantile Exchange pit traders. We find that both foreign currency futures and spot order flow contain unique information relevant to exchange rate determination. When we measure contributions to price discovery using the methods of Hasbrouck (1995) and Gonzalo and Granger (1995), we obtain results consistent with our order flow findings. Taken together, our evidence suggests that the amount of information contained in currency futures prices in 1996 is much greater than one would expect based on relative market size. Using data from 2006, we obtain quite different results, perhaps because of an increase in spot market transparency. In particular, we find in our more recent sample that the spot market has the dominant information share

Credit Ratings and Stock Liquidity

We analyze contemporaneous and predictive relations between credit ratings and measures of equity market liquidity and find that common measures of adverse selection, which reflect a portion of the uncertainty about future firm value, are larger when credit ratings are poorer. We also show that future rating changes can be predicted using current levels of adverse selection. Collectively, our results validate widely used microstructure measures of adverse selection and offer new insights into the value of credit ratings and the specific nature of the information they contain. Copyright 2006, Oxford University Press.

The Deterrent Effect of the Securities and Exchange Commission’s Enforcement Intensity on Illegal Insider Trading: Evidence from Run-up before News Events

We examine whether public enforcement of US insider-trading laws affects price discovery. Examining insider-trading civil cases filed by the Securities and Exchange Commission (SEC) from 2003 to 2011, we find that the price impact on insider-trading days is much smaller than the effect documented for the 1980s, consistent with increased fear of prosecution. Moreover, we find that preannouncement anticipatory run-up in comprehensive samples of takeover bids and earnings announcements is negatively related to resource-based measures of public enforcement intensity, which suggests that aggressive SEC enforcement deters illegal activity. In addition, we find that quoted bid-ask spreads are negatively related to the SEC’s enforcement intensity, which suggests that greater enforcement improves liquidity. Moreover, the negative and significant relation between run-up and the SEC’s enforcement intensity persists after controlling for quoted spreads

The Deterrent Effect of the Securities and Exchange Commission’s Enforcement Intensity on Illegal Insider Trading: Evidence from Run-up before News Events

We examine whether public enforcement of US insider-trading laws affects price discovery. Examining insider-trading civil cases filed by the Securities and Exchange Commission (SEC) from 2003 to 2011, we find that the price impact on insider-trading days is much smaller than the effect documented for the 1980s, consistent with increased fear of prosecution. Moreover, we find that preannouncement anticipatory run-up in comprehensive samples of takeover bids and earnings announcements is negatively related to resource-based measures of public enforcement intensity, which suggests that aggressive SEC enforcement deters illegal activity. In addition, we find that quoted bid-ask spreads are negatively related to the SEC’s enforcement intensity, which suggests that greater enforcement improves liquidity. Moreover, the negative and significant relation between run-up and the SEC’s enforcement intensity persists after controlling for quoted spreads