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

Using the staggered adoption of universal demand (UD) laws in the United States, we show that the reduction in shareholder litigation risk deteriorates firms’ stock price informativeness. This reduction in stock price informativeness is due to firms changing the way they invest rather than obfuscating or withholding firm-specific information. We also show that the reduction in litigation risk is associated

We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID)—an exogenous shock that increases liquidity. The effect of liquidity on default risk is more pronounced in countries with poorer investor protection and information environments

I study the conditions under which assets are sold or used as collateral. Secured loans can be optimal by reducing the lender's incentives to acquire costly information about the future value of collateral assets. Furthermore, when the borrower has incentives to falsify the assets' quality, the assets cannot be sold but can be used as collateral via over-collateralization, and secured loans are optimal

We study out-of-sample returns on 153 anomalies in equities documented in the academic literature. We show that machine learning techniques that aggregate all the anomalies into one mispricing signal are profitable around the globe and survive on a liquid universe of stocks. We investigate the value of international evidence for selection of quantitative strategies that outperform out-of-sample. Past

In this paper, I examine the effect of equity investor sentiment on the bond market. Sentiment can affect bond returns via two channels. First, in times of high investor sentiment, overvalued equity can lead to firm overinvestment, resulting in a negative impact on bond pricing due to an increase in default risk. Second, overvalued equity attracts capital flow to the equity market from the bond market

We study how the heterogeneity in investment horizons of local institutional investors affects the IPO market. Because short-term investors prefer more liquid stocks than long-term investors do and IPO stocks have high liquidity in the aftermarket, a higher presence of local short-term investors should be related to higher IPO underpricing. We test this hypothesis by constructing a geography-based

The recent LIBOR and ISDAfix manipulation scandals have inspired discussions about survey-based financial benchmarks. I investigate surveys as the statistical inference problem plagued by the principal-agent frictions between benchmark administrators and banks. Without knowing the distribution of private signals, an administrator can implement a sufficient expected quadratic penalty through random

We examine the price discovery contributions of cryptocurrency exchanges in the presence of market microstructure noise. Cryptocurrency markets exhibit a decisively higher level of microstructure noise compared with the NYSE or NASDAQ. Therefore, traditional measures of price discovery could be biased. To overcome this concern, we draw on the information leadership share proposed by Putniņš (2013);

The SEC’s NRSRO designation for Japanese credit rating agencies is suitable for examining certification and monitoring effects, as Japanese domestic bond markets are not subject to SEC regulations. We find that the certification increased the market share of new NRSROs compared to that of incumbent NRSROs. Moreover, bond issues rated by newly certified NRSROs obtained lower yields and their ratings