204 research outputs found

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

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    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

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    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.

    Anatomy of the Trading Process Empirical Evidence on the Behavior of Institutional Traders

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    This paper examines the behavior of institutional traders. We use unique data on the equity transactions of 21 institutions of differing investment styles which provide a detailed account of the anatomy of the trading process. The data include information on the number of days needed to fill an order and types of order placement strategies employed. We analyze the motivations for trade, the determinants of trade duration, and the choice of order type. The analysis provides some support for the predictions made by theoretical models, but suggests that these models fail to capture important dimensions of trading behavior

    The Relation Between Stock Market Movements and NYSE Seat Prices

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    Exchange seat prices are widely reported and followed as measures of market sentiment. This paper analyzes the information content of NYSE seat prices using: (1) annual seat prices from 1869 to 1998, and (2) the complete record of trades, bids and offers for the seat market from 1973 to 1994. Seat market volumes have predictive power regarding future stock market returns, consistent with a model where seat market activity is a proxy for unobserved factors affecting expected returns. We find abnormally large price movements in seats prior to October 1987, consistent with the hypothesis that seat prices capture market sentiment

    Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks

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    This paper develops a structural model of intraday price formation that embodies both information shocks and microstructure effects in an internally consistent, unified setting. The model allows us to better understand the observed intra-day patterns in bid-ask spreads, price volatility, transaction costs, as well as the autocorrelations of transaction returns and quote revisions. For example, the model simultaneously sheds light on why, over the day, (i) the variance of transaction price changes is U-shaped while the variance of ask price changes is declining, (ii) the bid-ask spread is U-shaped although information asymmetry and uncertainty over fundamentals is decreasing, and (iii) the autocorrelations of transaction price changes are large and negative, yet the autocorrelations of ask price changes are small and negative. In addition, the model’s parameters also provide a natural metric of price discovery and effective trading costs, which may prove useful in future studies

    Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks

    Get PDF
    This paper develops a structural model of intraday price formation that embodies both information shocks and microstructure effects in an internally consistent, unified setting. The model allows us to better understand the observed intra-day patterns in bid-ask spreads, price volatility, transaction costs, as well as the autocorrelations of transaction returns and quote revisions. For example, the model simultaneously sheds light on why, over the day, (i) the variance of transaction price changes is U-shaped while the variance of ask price changes is declining, (ii) the bid-ask spread is U-shaped although information asymmetry and uncertainty over fundamentals is decreasing, and (iii) the autocorrelations of transaction price changes are large and negative, yet the autocorrelations of ask price changes are small and negative. In addition, the model’s parameters also provide a natural metric of price discovery and effective trading costs, which may prove useful in future studies

    Money: A Market Microstructure Approach

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    The current discussion about the future of the financial system draws heavily on a set of theories known as the ‘New Monetary Economics’. The New Monetary Economics predicts that deregulation and financial innovation will lead to a moneyless world. This paper uses a market microstructure approach to show that a common medium of exchange that serves as unit of account will remain a necessary instrument to reduce transaction costs. This finding is supported by empirical evidence from foreign exchange markets
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