Related Securities, Allocation of Attention and Price Discovery: Evidence from NYSE-Listed Non-U.S. Stocks

In this paper we explore how the composition of a market maker's portfolio and allocation of attention across securities in the portfolio affect pricing. We analyze whether more attention devoted to similar securities enables a market maker to extract information relevant to a stock from order flow to related securities and consequently whether it leads to improved price discovery of the stock. We base on the recent literature on allocation of attention in share trading (Corwin and Coughenour, 2008; Boulatov et al., 2009) and define the prominence of a security as the proportion of its dollar volume in the total volume of the specialist portfolio it belongs to. Our empirical tests are focused on New York Stock Exchange specialists and the U.S. share in price discovery of 64 British and French companies cross-listed on the NYSE. We define related securities as stocks from the same country, the same region or other foreign stocks. We find strong evidence that an increase in the prominence of related stocks in the specialist portfolio leads to a higher U.S. share in price discovery of our sample stocks. We interpret our findings as evidence that concentrating market makers in similar stocks reduces information asymmetries and improves the information environment. To support our argument, we show that an increase in the prominence of other foreign stocks in the specialist portfolio significantly reduces the adverse selection component of the bid-ask spread.NYSE specialists, cross-listing, related stocks, price discovery

Uncovered Equity “Disparity” in Emerging Markets

The portfolio-rebalancing theory of Hau and Rey (2006) yields the uncovered equity parity (UEP) prediction that local-currency equity return appreciation is offset by currency depreciation. Vector autoregressive model estimation and tests for eight Asian emerging markets using daily data reveal instead a positive nexus between equity returns and currency returns. The extent of the uncovered equity “disparity” is time-varying and asymmetric since it exacerbates in crises. Our analysis suggests that the UEP failure is primarily due to investors’ return-chasing behavior. Robustness checks confirm that this explanation of the uncovered equity “disparity” is more appropriate than existing flight-to-safety or market risk conjectures

FX market liquidity, funding constraints and capital

We investigate the determinants of the time variation of the common component of FX market liquidity across developed and emerging market currencies. We study the impact of funding liquidity constraints, which proxy for supply considerations, and capital flows, which proxy for demand considerations of liquidity on transaction costs. Our results show that (i) funding liquidity constraints measured by the availability of outstanding repos reduce FX market liquidity, and their impact is stronger when they are associated with an increase in the costs of funding and a shortening of their maturity; (ii) increasing capital flows at the global level increase liquidity; (iii) both of these effects were stronger during the recent financial crisis, when liquidity dry-ups were severe; and (iv) the analysis of individual currencies with diverse riskiness confirms that a shock to speculator capital would lead to a reduction in market liquidity through a spiral effect that is stronger for more volatile currencies. Furthermore, we find a similar effect related to capital flow

European integration and corporate financing

This paper explores the importance of supply of capital for corporate financing. To identify this relation, we examine the impact of two exogenous events, entry to the EU and the adoption of Euro, which caused shifts in equity and credit markets during European integration. Following membership to EU, which eased access to equity capital, firms increase equity financing. Firms increase debt financing after the adoption of Euro, which improved access to international debt capital. We control for globalization, ongoing developments in equity and credit channels, firm characteristics, and the moderating effects of the country of origin