We apply techniques from the event probability forecasting literature to the analysis of spillover scenarios in economic and financial networks. A simple spillover scenario is expressed as an inequality constraint with respect to a single spillover measure. More complex spillover scenarios can be defined as combinations of simple scenarios. The scenario probabilities are evaluated using a non-parametric

We conduct a broad study of stochastic dominance efficiency on financial markets. We show that in the long run the vast majority of 17 equity market indices across the globe are inefficient at order two relative to their industry components. In the short run, the past stochastic dominance relation between the index and sub-indices predicts future dominance. Trading rules accounting for the predictability

We document significant changes in the relative price discovery of U.S. markets after the implementation of the SEC's Tick Size Pilot Program (TSPP). Controlling for the volume migration following the TSPP, we find systematic changes in the information share of markets, conditioned on their fee structure. Furthermore, these changes affect institutional trading. Analysis based on intermarket sweep (ISO)

We examine the market liquidity effects of enhanced information induced by the public registration of 144 A bonds, a significant and growing segment of the U.S. bond market. Using the regulatory version of TRACE data for the 2002–2013 period, we find that liquidity measures improve consistently for higher ex-ante information asymmetry issues following public registration of 144 A bonds. Our results

I examine the link between option and equity markets by considering the informational content of the option trading volume with respect to moneyness and maturity when the trade direction is unobserved. A high option trading volume of all maturity terms, deep-in-the-money put options, and deep-out-of-the-money call options, predicts higher leverage, increases in default risk, negative earnings surprises

We study the role mutual funds play in the recovery from fast intraday crashes based on data from the National Stock Exchange of India for a single large stock. During normal times, trading activity and liquidity provision by mutual funds is negligible compared to other traders at around 4% of overall activity. Nevertheless, for the two intraday market-wide crashes in our sample, price recovery took

We find that following options listings, U.S. firms enjoy an average 17 bps interest reduction in new bank loans. These savings are greater among more opaque borrowers, which provides support for the information production channel. This effect is, however, absent when the options market is illiquid or highly active. Consistent with risk-shifting, borrowers with more active options markets pay higher

Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional churn and liquidity.

We use institutional trade and dealer quote data to estimate transaction costs in the over-the-counter leveraged loan market. In the time series, we find an asymmetric response of transaction costs to loan market returns: negative market returns increase costs much more than positive returns decrease them. In the cross-section, our results support the inventory holding costs and adverse selection paradigms

The reliability of trade classification algorithms that identify the liquidity demander in financial markets transaction data has been questioned due to an increase in the frequency of quote changes. Hence, this paper proposes a new method. While established algorithms rely on an ad hoc assignment of trades to quotes, the proposed full-information (FI) algorithm actively searches for the quote that

I propose a novel structural setting to investigate the dynamics of information processing on equity prices and the exchange rate for cross-listed stocks. Using high-frequency data on Brazilian cross-listed firms, I disentangle the effects on firm value of the exchange rate from the other determinants of a firm's cash flow. In general, the results suggest that the U.S. is faster than the home market

We estimate a realistic process for noise trading to help theorists derive predictions from noisy rational expectations models. We characterize the trades of individual investors, who are natural candidates for the role of noise traders because their trades are weakly correlated with fundamentals, in line with how such models define noise trading. Data from a retail brokerage house, small and price-improved

We empirically show that the auction IPO share price is the equilibrium outcome of a sequential game between promoters and institutional investors. In this game, promoters' utility for information production and their utility for price stability are higher (lower) than their utility for IPO proceeds when they retain a large (small) fraction of the firm's equity. Conversely, institutional investors

In 2015, a Canadian stock exchange, TSX Alpha Exchange, implemented a speed bump for marketable orders and an inverted fee structure as part of a redesign. We find evidence of mild improvements in market quality after the redesign, and we do not find that Alpha appreciably segmented retail order flow away from other Canadian exchanges. For high-priced stocks, Alpha's users trade off improvements in

We document two important asset pricing implications of the data release process of US consumption growth. First, initial releases are more suitable for asset pricing than final revised releases. This is because most revisions smooth out essential short-term consumption growth fluctuations. Second, first revisions incorporate novel information and their magnitude is strongly linked to consumption growth

In modern public equity markets, liquidity is provided by a heterogeneous set of traders with vastly different speeds. We study the consequences of information arrival in such a setting. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following information events through (i) avoiding adverse selection by canceling mispriced quotes

We examine time-invariant and time-varying market integration across European stock markets. Financial integration increases during the sovereign debt crisis and is mainly driven by macroeconomic variables, market capitalization, political uncertainty, and technological developments. Higher market integration is associated with decreasing diversification benefits. During crises, investors select portfolios

We examine intraday time series momentum (ITSM) in an international setting by employing high-frequency data of 16 developed markets. We show that ITSM is economically sizable and statistically significant both in- and out-of-sample in most countries. Based on theories of investor behavior, we propose and test four hypotheses to reveal the source of ITSM profitability. We document both in the cross-section

We examine the effects of dealers' inventories on the pricing and liquidity of OTC derivatives markets. Using position and pricing data on credit default swap (CDS) indices, we document that the change in index CDS spreads is negatively associated with the change in dealers' net long positions. The effect of dealer inventory on CDS spreads is stronger after the Volcker Rule is implemented in the United

Hedge fund managers who do well in poker tournaments have better fund performance. This effect is stronger for tournaments with more entrants, larger buy-ins, larger cash prizes, and for managers who place higher or win multiple tournaments. After tournament wins, net flows to the manager's fund increase significantly. These increases are higher for tournaments with media coverage, when the tournament

Stock lending markets are unique because stock buyers become potential stock lenders. During periods of high short demand, loan supply should expand as some new buyers of loaned shares lend them. Using instrumental variables, we find instead that loan supply contracts: during times of high short demand, the marginal buyer lends stock at a lower rate than the average seller. We find that this puzzling

We examine the relation between jump variations and risk-neutral moments in volatility forecasting. We propose a method that involves no extrapolation in computing the risk-neutral moments of Bakshi et al. (2003) and document that risk-neutral skewness and kurtosis subsume the information content of historical jumps. While historical jumps have significant explanatory power for future volatility and

Motivated by a recent antitrust case in the credit default swap (CDS) market defined as “parallel exclusion”, we formulate an oligopoly model of simultaneous trading by dealers in the CDS and loan CDS (LCDS) markets. We show that in equilibrium it is optimal for incumbent dealers to take suitably designed opposite positions in the two markets. Limiting information to incumbents constitutes a barrier

We investigate whether asymmetric information in the equity market affects the information flow from the equity market to the credit default swap (CDS) market. We find that the response to stock price changes is larger if they are more informative. Moreover, firms with a lower CDS bid–ask spread are associated with a more rapid response. Our results suggest that asymmetric information in the equity

We test the pricing of the conditional systematic risk (β) of IML, a traded liquidity factor of the return premium on illiquid-minus-liquid stocks, with its risk premium varying over time. We find a positive and significant risk premium on conditional βIML, which rises in times of financial distress, measured by the corporate bond yield spread or broker–dealer loans (including margin loans). The conditional

Institutions exhibit substantial heterogeneity in trading behavior. Although many studies consider their investment horizon or portfolio concentration in isolation, we propose a two-way investor classification that jointly accounts for both characteristics. Our conceptual framework provides an intuitive account of each institutional investor group’s trading and the ensuing impact on market price dynamics

I model investors who are only able to access equity markets through a broker. These brokers have an incentive to route based on the fees charged by exchanges, rather than on execution quality for their clients. This conflict of interest reduces investor utility, as they must pay higher commissions to have orders sent to exchanges with the best market quality. I show that regulators may be able to

Exchanges implement intentional trade delays to limit the harmful impact of low-latency trading. Do such “speed bumps” curb investment in fast trading technology? Data are scarce since trading technologies are proprietary. We build an experimental trading platform where participants face speed bumps and can invest in fast trading technology. We find that asymmetric speed bumps, on average, reduce investment

We study how credit supply frictions in the regional availability of debt financing in the U.S. affect corporate yield spreads. We define a measure of debt inflexibility that captures the firm’s inability to buffer a tightening in bank credit by replacing bank loans with corporate bonds. We document that more inflexible firms suffer a higher increase in yield spreads as bank credit tightens. This happens

Investors demand higher premiums from firms whose future R&D performance is difficult to evaluate. We construct a measure of R&D information quality (RDIQ) by linking a firm's historical innovation input (R&D expenditures) and innovation outcome (sales) and find significant evidence that expected excess returns decrease with RDIQ. We find that the high-minus-low RDIQ hedge portfolio earns excess returns

The scheme of simultaneously testing many profitable strategies may conceal the hazard of data-snooping bias. However, certain portfolio returns are also more likely to exhibit codependency because of their same investment styles. Aiming at the phenomena of stock return anomalies, we consider two multiple testing approaches: one ignores the classification of portfolios and the other utilizes such information