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Abstract:
This study analyzes the information transmission mechanism linking oil futures with stock prices, where we examine the lead and lag cross-correlations of returns in one market with the others. We investigate the dynamic interactions between oil futures prices traded on the New York Mercantile Exchange (NYMEX) and U.S. stock prices, which allows us to examine the effects of energy shocks on financial markets. In particular, we examine the extent to which these markets are contemporaneously correlated, with particular attention paid to the association of oil price indexes with the S&P 500 index; 12 major industry stock price indices and 3 individual oil company stock price series. We also examine the extent to which price changes or returns in one market dynamically lead returns in the others and whether volatility spillover effects exist across these markets. Using VAR model estimates for various time series of returns we find that petroleum industry stock index and our three oil company stocks are the only series where we can reject the null hypothesis that oil futures do not lead Treasury Bill rates and stock returns, while we can reject the hypothesis that oil futures lag these other two series. Finally, the return volatility evidence for oil futures leading individual oil company stocks is much weaker than is the evidence for returns themselves.

Energy shocks, oil futures, oil price dynamics, stock price index dynamics, VAR model, return volatility

Abstract:
Analysis of FTSE 100 stock transactions data reported by the London Stock Exchange shows that trade frequency and average trade size impact price volatility for small trades (i.e. trades of one NMS or less). For large trades, only trade frequency affects price volatility. In further splitting small trades by relative size, trade frequency and average trade size are found to affect price volatility only for trades close to stocks' maximum guaranteed quoted depth. This evidence is consistent with microstructure models of dealer inventory adjustment and strategic behavior by informed traders, where dealers and uninformed traders face adverse selection costs.

Trading size, trading frequency, price volatility, London Stock Exchange, transactions data, informed trading, market microstructure models

Abstract:
Are auction markets or dealer markets better able to identify informed traders? Our analysis of firms that transfer to an alternative exchange structure indicates that traders are more anonymous in a competing dealer market than in an auction environment. Our evidence also shows that the associated changes in the probability of trading with an informed trader are related to changes in the bid-ask spread. The reduction in bid-ask spreads are more pronounced for firms with higher probability of transacting with an informed trader prior to the relocation from a dealer to an auction market.

Market Microstructure, Information-Based Trading, Trader Anonymity, Trading Costs, Exchange Listing

Abstract:
Are auction markets or dealer markets better able to identify informed traders? Our analysis of firms that transfer to an alternative exchange structure indicates that traders are more anonymous in a competing dealer market than in an auction environment. Our evidence also shows that the associated changes in the probability of trading with an informed trader are related to changes in the bid-ask spread. The reduction in bid-ask spreads are more pronounced for firms with higher probability of transacting with an informed trader prior to the relocation from a dealer to an auction market.

Market Microstructure, Information-Based Trading, Trader Anonymity, Trading Costs, Exchange Listing

Abstract:
The Federal Reserve Bank has the ability to change the money supply and to shape the expectations of market participants through their open market operations. These operations may amount to 20% of the day's volume and are concentrated during the half hour known as "Fed Time." Using previously unavailable data on open market operations from 1982 to 1988, our paper provides the first comprehensive examination of the impact of the Federal Reserve Bank's trading on both fixed income instruments and foreign currencies. Our results detail a dramatic increase in volatility during Fed Time, consistent with market expectations of Fed intervention during this time interval. We find that there is little systematic difference in market impact between reserve-draining and reserve-adding operations. Additionally, Fed Time volatility is, on average, higher on days when open market operations are absent. These results suggest that the markets are potentially confused about the purpose of the open market operations during our sample period. The evidence is also consistent with the Fed operations conveying information which smooths market participants' expectations. A revised version of this paper was published in the Journal of Financial Markets in 2002.

Federal Reserve Intervention, Bond market volatility, currency market volality, Reserve-draining operations, Reserve-adding operations, Fed Time

Abstract:
The Federal Reserve Bank has the ability to change the money supply and to shape the expectations of market participants through their open market operations. These operations may amount to 20% of the day's volume and are concentrated during the half hour known as `Fed Time'. Using previously unavailable data on open market operations, our paper provides the first comprehensive examination of the impact of the Federal Reserve Bank's trading on both fixed income instruments and foreign currencies. Our results detail a dramatic increase in volatility during Fed Time. Surprisingly, the Fed Time volatility is higher on days when open market operations are absent. In addition, little systematic differences in market impact are observed for reserve-draining versus reserve-adding operations. These results suggest that the financial markets correctly anticipate the purpose of open market operations but are unable to forecast the timing of the operations.

Abstract:
This study examines the impact of changing dealer competition and order flow across the 24 hour day on bid-ask spreads in the foreign exchange (FX) market. Using one year of tick-by-tick data in the spot Deutschmark-Dollar FX market, trading information is aggregated into 15 minute intervals over the trading day. Dealer competition is approximated by the number of individual dealers revising their quotes in each 15 minute interval. Bid-ask spreads, dealer activity and volatility are jointly modeled in a 3 equation VAR system, taking into account major market microstructure theories of spread determination which focus on adverse selection risk and inventory costs. Model estimation is by GMM, and takes into account a rich set of seasonal patterns and strong serial correlation in the dependent variables. Consistent with market microstructure theory, bid-ask spreads decrease as predicted dealer activity rises and as predicted FX volatility falls. Dealer competition is strongly time-varying and highly predictable, reflecting changing business activity over the 24-hour trading day as major Asian, European and North American markets open and close. Model estimates show that an expected addition of another dealer lowers average quoted spreads by 1.7%, while a 10% rise in FX volatility raises average quoted spreads by 10%.

Foreign Exchange, FX Trading, Market Microstructure Models, Tick-by-Tick Trades, 24 Hour Trading, Dealer Competition, Market Making, Dealer Market, Bid-Ask Spread, FX Volatility, VAR model, GMM

Abstract:
The literature on foreign portfolio ownership in developed markets suggests that investors minimize their informational disadvantage when making foreign investments. We examine Taiwan, an emerging financial market where news of foreign institutional portfolio ownership is closely and widely scrutinized by the market participants. Our empirical analyses reveal that foreign institutions have pronounced valuation effects in Taiwan. We find a startling foreign ownership effect whereby stocks with high foreign ownership outperform stocks with low foreign ownership. Although foreigners tend to own export-oriented and large firms, the foreign ownership effect is present even after controlling for exports, size, or transparency levels. Foreign portfolio ownership is also strongly and positively associated with firm performance. Finally, foreign investment levels can explain the performance of long-term foreign investment flows. Our formal empirical results and market observations are consistent with foreign institutions that use their informational advantage to select and invest in local stocks and to monitor them afterwards.

Foreign Ownership, Monitor, Information Advantage, Emerging Markets

Abstract:
The study is divided into four broad parts, beginning with an exploratory analysis of the data on expost returns on corporate equities and bonds for the 1926-80 period. In Part 2, we estimate the relationships between one-month expost returns on corporate bonds and equities andvariations in Treasury bill rates, economic activity, and other variables.The major other variable is unanticipated changes in new issue coupon rates on long-term Treasury bonds. Parts 3 and 4 contain econometric investigations of the determinants of one-month Treasury bill rates and unanticipated changes in long-term Treasury coupon rates, respectively. These parts extend the analysis of Part 2 by explaining variables that determine expost corporate bond and equity returns and provide evidence on the determination of new-issue yields on short- and long-term default-free debt. The last three parts ofthe study report econometric results based on data from the 1953-83 period.A number of important issues are addressed in the econometric parts of the paper. These include: the validity of the Modigliani-Cohn valuation-error hypothesis, the measurement of Merton`s "excess return on the market", the relationship between real new-issue debt rates and real economic activity, and the usefulness of the Livingston survey data in explaining financial returns.

Abstract:
This paper compares the quality of quotes submitted by electronic communication networks (ECNs) and by traditional market makers to the Nasdaq quote montage. An analysis of the most active Nasdaq stocks shows that ECNs not only post informative quotes, but also, compared to market makers, ECNs post quotes rapidly and are more often at the inside. Additionally, ECN quoted spreads are smaller than dealer quoted spreads. The evidence suggests that the proliferation of alternative trading venues, such as ECNs, may promote quote quality rather than fragmenting markets. Moreover, the results suggest that a more open book contributes to quote quality.

Abstract:
This paper examines the change in trading costs for firms that choose to move from a dealer market to a specialist system. Using transactions data, our empirical results reveal structurally induced average trading cost reductions of 4.7 (5.2) cents per share for firms that moved from the NASDAQ/NMS to the NYSE (Amex) in 1990. For NYSE listed stocks, the trading costs reductions are equally divided between quote improvements and the routing of trades to the NYSE. Trading costs improvements vary inversely with trade sizes and positively with dollar spreads. Finally, the greatest liquidity benefits from listing accrue to the less liquid stocks.

Abstract:
Execution costs for a sample of Nasdaq stocks significantly exceed those for a matched sample of NYSE stocks. Execution costs are measured by the quoted spread, the effective spread (which accounts for trades inside the quotes), the realized spread (which measures revenues of suppliers of immediacy), the Roll (1984) implied spread, and a measure of post-trade variability. By these measures the Nasdaq execution cost is twice the NYSE cost. The difference is not due to differences in the stocks, for we match on stock characteristics. Nor is it due to the presence of informed traders, for we find that Nasdaq dealers lose a smaller fraction of the quoted spread than do NYSE suppliers of immediacy. We rule out differences in the frequency of even eighth quotes. The increase in affirmative obligation on dealers and the rise in institutional trading are eliminated as possible sources of the differential. Partial explanations are provided by the fact that Nasdaq dealers do not charge commissions to institutions and that limit orders cannot compete with dealers in Nasdaq. We conclude that the primary explanation is the internalization and preferencing of order flow on Nasdaq that limit the incentive to narrow spreads. Execution costs are large because there has been little incentive to reduce them.