The author systematically examines one of the important issues of information — establishing the market price. He introduces the concept of «search» — where a buyer wanting to get a better price, is forced to question sellers. The article deals with various aspects of finding the necessary information.

Economics of Information

/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

Investor Psychology and Security Market Under- and Overreactions

机构投资者作为证券市场中的重要力量,越来越受到理论界和实务界的关注。论文对宾夕法尼亚大学沃顿商学院会计学教授布赖恩-布希（Brian Bushee）的论文＂The influence of institutional investors on myopic R＆D investment behavior＂（机构投资者对企业短视研发投资行为的影响,以下简称Bushee（1998））进行评价并提出相关的建议和研究方向。

《The influence of institutional investors on myopic R＆D investment behavior》述评

This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidityadjusted capital asset pricing model, a security s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity. r 2005 Elsevier B.V. All rights reserved.

Market Liquidity: Asset Pricing with Liquidity Risk

Equity markets world-wide have seen a proliferation of trading venues and the consequent fragmentation of order flow. In this paper, we examine how fragmentation of trading is affecting the quality of trading in U.S. markets. We propose using newly-available TRF (trade reporting facilities) volumes to proxy for fragmentation levels in individual stocks, and we use a matched sample to compare execution quality and efficiency of stocks with more and less fragmented trading. We find that market fragmentation generally reduces transactions costs and increases execution speeds. Fragmentation does increase short-term volatility, but prices are more efficient in that they are closer to being a random walk. Our results that fragmentation does not appear to harm market quality have important implications for regulatory policy.

Is Market Fragmentation Harming Market Quality

Is market fragmentation harming market quality

We investigate odd-lot trades in equity markets. Odd lots are increasingly used in algorithmic and high-frequency trading, but are not reported to the consolidated tape or in databases such as TAQ. In our sample, the median number of odd-lot trades is 24% but in some stocks odd lots are 60% or more of trading. Odd-lot trades contribute 35% of price discovery, consistent with informed traders using odd lots to avoid detection. Omitting odd-lot trades leads to inaccuracies in order imbalance measures and makes sentiment measures unreliable. Excluding odd lots from the consolidated tape raises important regulatory issues.

What's Not There: Odd Lots and Market Data

We show that two exogenous technology shocks that increase the speed of trading from microseconds to nanoseconds do not lead to improvements on quoted spread, effective spread, trading volume or variance ratio. However, cancellation/execution ratio increases dramatically from 26:1 to 32:1, short term volatility increases and market depth decreases. We find evidence consistent with “quote stuffing,” which involves submitting an extraordinarily large number of orders followed by immediate cancellation in order to generate order congestion. The stock data are handled by six independent channels in the NASDAQ based on alphabetic order of ticker symbols. We detect abnormally high levels of co-movement of message flows for stocks in the same channel using factor regression, a discontinuity test and diff-in-diff test. Our results suggest that an arms race in speed at the sub-millisecond level is a positional game in which a trader’s pay-off depends on her speed relative to other traders. This game leads to positional externality (Frank and Bernanke, 2012), in which private benefit leads to offsetting investments on speed, or effort to slow down other traders or the exchange, with no observed social benefit.

/pdf/the-externalities-of-high-frequency-trading-1-wuhsporslx.pdf

The Externalities of High-Frequency Trading 1

This paper applies the Least Absolute Shrinkage and Selection Operator (LASSO) to make rolling one‐minute‐ahead return forecasts using the entire cross‐section of lagged returns as candidate predictors. The LASSO increases both out‐of‐sample fit and forecast‐implied Sharpe ratios. This out‐of‐sample success comes from identifying predictors that are unexpected, short‐lived, and sparse. Although the LASSO uses a statistical rule rather than economic intuition to identify predictors, the predictors it identifies are nevertheless associated with economically meaningful events: the LASSO tends to identify as predictors stocks with news about fundamentals.

/pdf/sparse-signals-in-the-cross-section-of-returns-54oors7w0f.pdf

Mao Ye

Papers

Is Market Fragmentation Harming Market Quality

Is market fragmentation harming market quality

What's Not There: Odd Lots and Market Data

The Externalities of High-Frequency Trading 1

Sparse Signals in the Cross-Section of Returns