Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time

Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity, and volatility, and analyzes their determinants using panel-data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets in particular have significantly higher trading costs even after correcting for factors affecting costs such as market capitalization and volatility. We analyze the inter-relationships between turnover, equity trading costs, and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account.http://deepblue.lib.umich.edu/bitstream/2027.42/39706/3/wp322.pd

Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time

Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity, and volatility, and analyzes their determinants using panel-data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets in particular have significantly higher trading costs even after correcting for factors affecting costs such as market capitalization and volatility. We analyze the inter-relationships between turnover, equity trading costs, and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account.privatization, government priorities, auctions, revenue maximization, probit analysis, selection bias.

Market Structure and Cyclical Fluctuations in U.S. Manufacturing

The relevance of imperfect competition for models of aggregate economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. Measuring properly the size of industry markups of price over marginal cost is important both for assessing the role of market structure and for determining the extent to which excess capacity is a significant feature accompanying imperfect competition in American industry. Using a panel data set on four-digit Census manufacturing industries, this paper expands recent work by Robert Hall on the importance of market structure for understanding cyclical fluctuations. We outline a methodology for estimating industry markups of price over cost and the influence of market structure on cyclical movements in total factor productivity. While we find evidence to support the proposition that price exceeds marginal cost in U.S. manufacturing, our results offer only limited support for the notion that markups are importantly related to differences in industry concentration, though the effect of unionization is important. Concentration effects are important only in industries producing durable goods or differentiated consumer goods. In addition, much of the estimated markup of price over marginal cost is accounted for by fixed costs related to overhead labor, advertising, and central office expenses; we do not find compelling evidence of substantial evidence of excess capacity in most industries.

Business Cycles and Oligopoly Supergames: Some Empirical Evidence on Prices and Margins

There has been a significant interest on a theoretical level in the application of supergames to oligopoly behavior. Implications for pricing behavior in trigger-strategy models in response to aggregate demand are of particular importance for public policy considerations. We contrast the predictions for the movements of industry prices over the business cycle of two such models -- put forth by Edward Green and Robert Porter and by Julio Rotemberg and Garth Saloner -- and test the predictions using a panel data set of U.S. manufacturing industries. Our principal findings are four. First, the levels of price-cost margins of concentrated, homogeneous-goods industries, while higher than those of unconcentrated counterparts, appear to be closer to those predicted by a single-period Cournot-Nash equilibrium than monopoly. Second, there is little evidence to support the idea that price-cost margins of these industries have different cyclical patterns from other industries apart from effects by level of industry concentration. Maximum price declines for concentrated industries give little support for the occurrence of price wars during either recessions or booms. Finally, consistent with the predictions of the Rotemberg-Saloner model, the industries with high price-cost margins have more countercyclical price movements than those exhibited by other industries. That gradual price adjustment is quantitatively important for those industries, suggests, however, that other factors may lie behind the apparent rigidity of prices.

A Consistent Test of Stationary Ergodicity

A formal statistical test of stationary-ergodicity is developed for known Markovian processes on R^d. This makes it applicable to testing models and algorithms, as well as estimated time series processes ignoring the estimation error. The analysis is conducted by examining the asymptotic properties of the Markov operator on density space generated by the transition in the state space. The test is developed under the null of stationary-ergodicity, and it is shown to be consistent against the alternative of nonstationary-ergodicity. The test can be easily performed using any of a number of standard statistical and mathematical computer packages

Using Weighted Nonlinear Least Squares to Estimate Fish Population Dynamics Models

Estimation and inference for weighted nonlinear least squares regressions are examined for the case in which the regressors are stochastic, rather than fixed, and where erros may be both heteroscedastic and serially correlated. The usual least squares parameter covarience matrix estimator may be invalid in such cases, and a new covariance matrix estimator is given. General statistics for testing hypotheses about the parameters are provided, as well as new tests for model misspecification. The methodology is applied to the estimation of population dynamics models for the anchovy ("Engraulis mordax").nonlinear least squares, heteroscedasticity, misspecification, population models, northern anchovy

The position profiles of order cancellations in an emerging stock market

Order submission and cancellation are two constituent actions of stock trading behaviors in order-driven markets. Order submission dynamics has been extensively studied for different markets, while order cancellation dynamics is less understood. There are two positions associated with a cancellation, that is, the price level in the limit-order book (LOB) and the position in the queue at each price level. We study the profiles of these two order cancellation positions through rebuilding the limit-order book using the order flow data of 23 liquid stocks traded on the Shenzhen Stock Exchange in the year 2003. We find that the profiles of relative price levels where cancellations occur obey a log-normal distribution. After normalizing the relative price level by removing the factor of order numbers stored at the price level, we find that the profiles exhibit a power-law scaling behavior on the right tails for both buy and sell orders. When focusing on the order cancellation positions in the queue at each price level, we find that the profiles increase rapidly in the front of the queue, and then fluctuate around a constant value till the end of the queue. These profiles are similar for different stocks. In addition, the profiles of cancellation positions can be fitted by an exponent function for both buy and sell orders. These two kinds of cancellation profiles seem universal for different stocks investigated and exhibit minor asymmetry between buy and sell orders. Our empirical findings shed new light on the order cancellation dynamics and pose constraints on the construction of order-driven stock market models.Comment: 17 pages, 6 figures and 6 table