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Abstract:
The Internet technology reduces the cost of transmitting and exchanging information. ECNs exploit this opportunity to enable investors to place quotes at very little cost and compete with incumbent stock exchanges. Does this quasi-free entry situation lead to competitive liquidity supply? We analyze trades and order book dynamics on Nasdaq and Island. The Nasdaq touch is frequently undercut by Island limit orders, using the finer tick size prevailing on that ECN. Before decimalization, the coarse tick size constrained Nasdaq spreads, and undercutting Island limit order traders earned oligopoly rents. After decimalization, the hypothesis that liquidity suppliers do not earn rents cannot be rejected.

financial markets, liquidity supply, ECN, Island, NASDAQ

Abstract:
We investigate the optimal intertemporal asset allocation and location decisions for an investor with both taxable and tax-deferred investment opportunities. With unrestricted borrowing opportunities, the investor optimally allocates his entire tax-deferred wealth to taxable bonds and combines either borrowing or lending with investment in equity in the taxable account to achieve his optimal overall risk exposure. When the investor is prohibited from borrowing, the optimal asset allocation in his tax-deferred account may consist of both bonds and stocks, but only if the wealth in his taxable account is allocated entirely to equity. The preference for holding taxable bonds in the tax-deferred account and equity in the taxable account reflects the higher ordinary income on bonds and the tax avoidance strategies available on equity. The effect of liquidity shocks on the optimal asset location policy is also examined. Our results are in striking contrast to the asset location choices observed in practice.

Taxable and tax-deferred investing, Asset location, Asset allocation

Abstract:
We analyze theoretically and empirically the implications of heterogeneous information for equilibrium asset pricing and portfolio choice. Our theoretical framework, directly inspired by Admati (1985), implies that with partial information aggregation, portfolio separation fails, buy-and-hold strategies are not optimal, and investors should structure their portfolios using the information contained in prices in order to cope with winner's curse problems. We implement empirically such a price-contingent portfolio allocation strategy and show that it outperforms economically and statistically the passive/indexing buy-and-hold strategy. We thus demonstrate that prices reveal information, in contrast with the homogeneous information CAPM, but only partially, consistent with a Noisy Rational Expectations Equilibrium. The success of our pricecontingent strategy does not proxy for the success of trading strategies based purely on historical performance, such as momentum investment.

Abstract:
This article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short-sale restrictions. The optimal decisions are a function of the investor's age, initial portfolio holdings, and tax basis. Our results capture the trade-off between the diversification benefits and tax costs of trading over an investor's lifetime. The incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor's age. Contrary to standard financial advice, the optimal equity holding increases well into an investor's lifetime in our model due to the forgiveness of capital gains taxes at death.

Capital gains taxes; Optimal consumption and investment policies; Diversification and tax costs; Reset provision

Abstract:
We examine how financial theory and economic principles offer guidance and predictions about the organization of investments and asset allocation decisions given the structure of taxes in estate - planning situations. We provide insight about many of the conventional approaches to estate planning and suggest how these strategies can be enhanced. For example, we show that the advantage of the reset provision by which the investor's capital gains tax bases are adjusted to the market value at the time of death is greater in the presence of individual rather than joint ownership of assets, provided that at the first death of one of the joint owners the basis is reset to an average of the date of death value and the survivor's original cost. We analyze asset location and distribution policies in the context of trusts that are outside of the taxable estate of its principal beneficiary as well as direct funds owned by the beneficiary, highlighting the interaction between estate taxation and the reset of the capital gains tax basis at death. We compare the optimal decisions for traditional tax-deferred accounts and after-tax ("Roth") IRAs. Finally, we also examine the value and importance of borrowing in various contexts in estate planning.

Abstract:
We examine the impact of capital gains taxes upon the structure of an investor's optimal portfolio in the presence of multiple risky assets. Our numerical solutions suggest that the diversification benefits of reducing the exposure to a highly volatile concentrated position significantly outweigh the tax costs of selling, even for elderly investors. The presence of multiple risky assets in which the investor earns a substantial risk premium strongly increases the diversification incentive. We also contrast the impact of capital gains taxes and traditional transaction costs on rebalancing decisions and show that it can be optimal for the investor to reduce his overall equity exposure by selling underweighted assets with relatively small capital gains. Finally, we discuss the general qualitative features of the optimal investment policy in a broader context. Both our numerical and qualitative analyses show how the realization decision on one asset depends upon the embedded gains on other assets.

Optimal portfolio, Capital gains taxes, Multiple risky assets, Diversification

Abstract:
We survey the literature analysing the price formation and trading process, and the consequences of market organization for price discovery and welfare. We develop a united perspective on theoretical, empirical and experimental approaches. We discuss the evidence on transaction costs and the price impact of trades and its analyses in terms of adverse selection, inventory costs and market power. We review the extent to which the associated frictions can be mitigated by such features of market design as the degree of transparency, the use of call auctions, the discreteness of the pricing grid and the regulation of competition between liquidity suppliers or exchanges.

Market microstructure, liquidity, bid-ask spread, market design, transactions costs

Abstract:
This paper studies the information content and consequences of third-party voting advice issued during proxy contests. We document significant abnormal stock returns around proxy vote recommendations and develop an estimation procedure for disentangling stock price effects due to changes in outcome probabilities from those due to changes in outcome-contingent valuations. We find that voting advice is a good predictor of contest outcomes and that vote recommendations appear to certify the extent to which dissidents can add value. Thus, proxy advice seems to play a dual informational role in financial markets.

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Abstract:
This paper explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs. In the long-term region, investors realize all gains below some critical cutoff level, which we derive analytically. In the short-term region, investors defer all gains and, depending upon the time remaining in the short-term region, may also defer small losses. Contrary to common intuition, deferral of short-term losses can be optimal even without transaction costs. The value of tax timing is considerably higher under the optimal trading strategy than under alternative strategies previously analyzed. The impact of offset rules is also explored.

Abstract:
As a centralized, computerized, limit order market, the Paris Bourse is particularly appropriate for studying the interaction between the order book and order flow. Descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the book is somewhat larger at nearby valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books result in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases).

Abstract:
Because the Paris Bourse is a centralized, computerized, limit order market, the dataset it generates is particularly appropriate for studying the interaction between the order book and order flow dynamics. We use descriptive methods to capture the richness of the data and the distinctive aspects of the market structure. We characterize the average order book and order flow. Order flow is concentrated near the quote, while the book is somewhat thinner at the quote than at nearby valuations. We analyze how the order flow is affected by the state of the book and the previous order flow documenting the supply and demand of liquidity in the market. For example, we find that thin books elicit orders and thick books result in trades. We also find evidence of priority effects. For example, investors quickly place orders within the quotes when the depth at the quotes is large or when the spread is large in order to gain price and time priority. Some of our results are also consistent with information effects. For example, a downward (upward) shift in the bid and ask quotes is observed after large sales (purchases).