The Liquidity Premium in Equity Pricing under a Continuous Auction System.

The paper shows that the cost of illiquidity is not (positively) priced over all months in the Spanish continuous auction system, where liquidity is provideh in the absence of market makers. Two distinct approaches are employed. Both the two-step traditional cross-sectional method and the pooled cross-section time series analysis tend to indicate that the liquidity premium is negative during months other than January. Morever, the liquidity premium in January is positive (although not significant) and at the 10% level it seems to be significantly higher than the liquidity premium over the rest of the year. Therefore, given the previous results for the US market, we conclude that, independently of the market trading mechanism with the exception of NASDAQ, the behaviour of the relationship between the bid-ask spread and stock returns is rather similar.asset pricing; market microstructure; liquidity premium;

Adverse selection, volume and transactions around dividend announcements in a continuous auction system.

We show that liquidity providers do not significantly respond to changes in information asymmetry risks, at least when we analyse their trading behaviour around dividend announcements of a representative sample of stocks in a continuous auction trading mechanism. the implicit bid-ask spread does not seem to change beyond what is normally conveyed through an increased number of transactions. We also document that the information in the trading behaviour of investors is primarily contained in the number of daily transactions.adverse selection; bid-ask spread; limit orders; dividend announcements;

Fragmentation vs. consolidation in Spanish Stock Exchange. A note.

After the implementation of MiFID (I and II), competition is a reality in all the European Cash Markets. A natural consequence of competition is that orderflowis fragmented in different type of venues. This paper focuses on the consequences of fragmentation on the local market liquidity of the Spanish Stock Exchange (hereafter SSE). Our main result shows that, for our sample, fragmentation is relevant determining the cost of liquidity. Following the analysis of Degryse et al. (2014), the linear component of fragmentation has a positive and significant effect on liquidity (reduces spreads and increases Kyle’s Lambda) and the quadratic term has a negative and significant effect on liquidity (increases spreads and reduces Kyle’s Lambda). So, fragmentation is good for liquidity but beyond a given level of fragmentation, increasing it is worse for the liquidity of the regulated market.Mikel Tapia acknowledges financial support from Ministerio de Ciencia y Tecnologia grant ECO2012-3502

Resultados preliminares sobre la estacionalidad de la prima por liquidez en España: efectos fiscales.

En este trabajo, estudiamos la estacionalidad de la prima por liquidez. Concretamente, tenernos en cuenta la influencia de la contratación por motivos impositivos. Observamos cómo existen comportamientos claramente diferentes en la prima por liquidez. Sin embargo, dicho comportamiento no está reflejado en los activos con mayor probabilidad de contratación por motivos fiscales. Los resultados se aproximan a los encontrados por Basarrate y Rubio (1995) para la prima por riesgo en el mercado español de valores. Adicionalmente, al incluir la variable tamaño, los resultados se vuelven más débiles.Mercados financieros; Mercado de valores; Contratación bursátil; Variaciones estacionales; Mercado de renta variable; Impuestos; España;

Adverse selection costs, trading activity and price discovery in the NYSE: An empirical analysis.

This paper studies the role that trading activity plays in the price discovery process of a NYSE-listed stock. We measure the expected information content of each trade by estimating its permanent price impact. It depends on observable trade features and market conditions. We also estimate the time required for quotes to incorporate all the information content of a particular trade. Our results show that price discovery is faster after risky trades and also at the extreme intervals of the session. The quote adjustment to trade-related shocks is progressive and this causes risk persistency and unusual short-term market conditions.Microstructure; Adverse selection costs; Trade-related information; High-frequency data;

DISCLOSURE AND LIQUIDITY

The purpose of this paper is to test empirically the relationship between two important concepts: disclosure and liquidity. Using a sample of Spanish quoted firms between 1994 and 2000 we show that the estimation of the relationship between disclosure and liquidity depends crucially on two factors: a) the multidimensionality of the concept of liquidity; b) the use of an econometric methodology that deals properly with the features of the sample used. However the use of the Amihud (2002) illiquidity measure provides evidence in favour of a positive relationship between disclosure and liquidity.

Globalization, Superstars, and the Importance of Reputation: Theory & Evidence from the Wine Industry

We develop a simple model of the effects of reputation on wine prices. An increasing fraction of consumers who are “naïve” (less well informed about wine quality) results in a stronger sensitivity of wine prices to ratings of quality. We then use data on prices and Robert Parker’s ratings of wines, to show that prices have become more related to Parker ratings over time. In addition, we find that a change in Parker rating has a stronger effect on price, the stronger is the wine’s reputation.No; keywords

PRICE DISCOVERY IN THE PRE-OPENING PERIOD. THEORY AND EVIDENCE FROM THE MADRID STOCK EXCHANGE

Some stock exchanges, such as the Spanish Stock Exchange and Euronext (Paris), allow traders to place orders in a ‘pre-opening’ period. Orders placed in this period are used to determine the opening price, and can be cancelled at any moment and at no cost by the traders. We consider a model in which noise traders can appear in the market before or after the opening, and a strategic informed trader decides her order strategy at the pre-opening and at the opening period. We characterize the equilibrium of such a model, showing that at the pre-opening there is a non-monotonic relation between the aggregate quantity ordered and prices. Thus, the equilibrium at the pre-opening stage is determined in a way which is fundamentally different from the equilibrium in the open market. We proceed to study the implications of the existence of a pre-opening period on information revelation and on the determination of the opening price. We present evidence from the Spanish Stock Exchange that seem to support the theoretical predictions, showing a clear different in behaviour between the market behaviour before and after the opening of the market.

Price Discovery in the Pre-Opening Period. Theory and Evidence from the Madrid Stock Exchange.

Some stock exchanges, such as the Spanish Stock Exchange and Euronext (Paris), allow traders to place orders in a `pre-opening' period. Orders placed in this period are used to determine the opening price, and can be cancelled at any moment and at no cost by the traders. We consider a model in which noise traders can appear in the market before or after the opening, and a strategic informed trader decides her order strategy at the preopening and at the opening period. We characterize the equilibrium of such a model, showing that at the pre-opening there is a non-monotonic relation between the aggregate quantity ordered and prices. Thus, the equilibrium at the preopening stage is determined in a way which is fundamentally diferent from the equilibrium in the open market. We proceed to study the implications of the existence of a pre-opening period on information revelation and on the determination of the opening price. We present evidence from the Spanish Stock Exchange that seem to support the theoretical predictions, showing a clear diference in behavior between the market behavior before and after the opening of the market.

Liquidez: un enfoque metodológico.

La liquidez de los activos financieros es una característica fundamental en la definición de los costes en los que incurren los inversores a la hora de realizar una operación en cualquier mercado financiero. La búsqueda de una medida lo más completa posible de la misma sigue siendo hoy uno de los aspectos más debatidos por los expertos y académicos que escrutan los mercados.