Lawrence R. Glosten

Bio: Lawrence R. Glosten is an academic researcher from Columbia University. The author has contributed to research in topics: Market liquidity & Market microstructure. The author has an hindex of 19, co-authored 37 publications receiving 19022 citations. Previous affiliations of Lawrence R. Glosten include University of Chicago & Northwestern University.

On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks

Abstract: We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility. THE TRADEOFF BETWEEN RISK and return has long been an important topic in asset valuation research. Most of this research has examined the tradeoff between risk and return among different securities within a given time period. The intertemporal relation between risk and return has been examined by several authors-Fama and Schwert (1977), French, Schwert, and Stambaugh (1987), Harvey (1989), Campbell and Hentschel (1992), Nelson (1991), and Chan, Karolyi, and Stulz (1992), to name a few. This paper extends that research.

Is the Electronic Open Limit Order Book Inevitable

Abstract: Under fairly general conditions, the article derives the equilibrium price schedule determined by the bids and offers in an open limit order book. The analysis shows: (1) the order book has a small-trade positive bid-ask spread, and limit orders profit from small trades; (2) the electronic exchange provides as much liquidity as possible in extreme situations; (3) the limit order book does not invite competition from third market dealers, while other trading institutions do; (4) If an entering exchange earns nonnegative trading profits, the consolidated price schedule matches the limit order book price schedule. THIS ARTICLE PROVIDES AN analysis of an idealized electronic open limit order book. The focus of the article is the nature of equilibrium in such a market and how an open limit order book fares against competition from other methods of exchanging securities. The analysis suggests that an electronic open limit order book mimics competition among anonymous exchanges. As a result, there is no incentive to set up a competing anonymous dealer market. On the other hand, any other anonymous exchange will invite "third market" competition. These conclusions suggest that an electronic open limit order book of the sort considered here has a chance of being a center of significant trading volume. The analysis does not imply that an electronic limit order book will be, or should be the only trading institution. It does suggest some of the characteristics that an alternative institution should have in ord'er to successfully compete with an electronic exchange. The results are obtained in a fairly general environment, and hence would appear to be robust. The motivation for the article lies in recent developments in information processing technology, the interest in institutional innovation in the securities industry, and the uncertainty about future developments in trading

Economic Significance of Predictable Variations in Stock Index Returns

Abstract: Knowledge of the one-month interest rate is useful in forecasting the sign as well as the variance of the excess return on stocks. The services of a portfolio manager who makes use of the forecasting model to shift funds between bills and stocks would be worth an annual management fee of 2% of the value of the assets managed. During 1954:4 to 1986:12, the variance of monthly returns on the managed portfolio was about 60% of the variance of the returns on the value weighted index, whereas the average return was two basis points higher. A STATISTICALLY SIGNIFICANT NEGATIVE correlation between nominal excess returns on stocks and nominal interest rates has been noted in the financial economics literature. In this paper we examine the economic importance of the ability of nominal interest rates to forecast nominal excess returns on stocks. The qualitative conclusion of the paper is that the forecasting ability of treasury bill rates is economically significant. The evidence suggests that this is true because both the expected value and the variance of the nominal stock excess returns depend in interesting ways on the nominal interest rate.' Our approach to evaluating the economic importance of the negative correlation between the nominal interest rate and stock returns is similar in spirit to Fama and Schwert (1977), who examine whether the statistically significant negative correlation between stock returns and nominal interest rates can be used to forecast times when the expected nominal risk premium on stocks is negative. They conclude that the negative slope coefficient in the regression of stock returns on treasury bill returns is not useful in predicting times when stocks do worse than bills. This is probably too stringent a measure of economic importance-we are able to show economic significance despite the inability of the model to consistently forecast periods with a negative risk premium. Our primary assumption is that the model used to forecast stock index returns is known to sophisticated investors; i.e., the model is predicting (market) expected

The Promise of Entrepreneurship as a Field of Research

Abstract: To date, the phenomenon of entrepreneurship has lacked a conceptual framework. In this note we draw upon previous research conducted in the different social science disciplines and applied fields of business to create a conceptual framework for the field. With this framework we explain a set of empirical phenomena and predict a set of outcomes not explained or predicted by conceptual frameworks already in existence in other fields.

Conditional heteroskedasticity in asset returns: a new approach

Abstract: This paper introduces an ARCH model (exponential ARCH) that (1) allows correlation between returns and volatility innovations (an important feature of stock market volatility changes), (2) eliminates the need for inequality constraints on parameters, and (3) allows for a straightforward interpretation of the "persistence" of shocks to volatility. In the above respects, it is an improvement over the widely-used GARCH model. The model is applied to study volatility changes and the risk premium on the CRSP Value-Weighted Market Index from 1962 to 1987. Copyright 1991 by The Econometric Society.

On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks

Abstract: We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility. THE TRADEOFF BETWEEN RISK and return has long been an important topic in asset valuation research. Most of this research has examined the tradeoff between risk and return among different securities within a given time period. The intertemporal relation between risk and return has been examined by several authors-Fama and Schwert (1977), French, Schwert, and Stambaugh (1987), Harvey (1989), Campbell and Hentschel (1992), Nelson (1991), and Chan, Karolyi, and Stulz (1992), to name a few. This paper extends that research.