Can Investors Benefit from Market Transparency? An Asset Allocation Perspective
Warwick Business School - Finance Group - Financial Econometrics Research Centre
City University London - Sir John Cass Business School
University of Warwick
April 25, 2011
A current debate in finance concerns transparency in financial markets and the disclosure of counterparty identity information. We use a simple mean-variance framework and data from Helsinki Stock Exchange to explore the asset allocation implications of post-trade market transparency. We find that broker identity conveys information that is economically significant. A mean-variance investor can benefit remarkably, up to 36% (annualized) percentage points for the most parsimonious forecasting model, from knowing who trades. A second result is the substantial variation in the information content of order flow at the broker level. We show that the predictive power of broker customer order flow can be attributed to observable broker-specific characteristics: market share, daily volume, investment style and degree of sophistication.
Number of Pages in PDF File: 48
Keywords: Market Transparency, Asset Allocation, Broker Heterogeneity, Customer Order Flow
JEL Classification: C53, G11, G14, G18, G24working papers series
Date posted: April 24, 2011 ; Last revised: February 27, 2012
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