Can Investors Benefit from Market Transparency? - An Asset Allocation Perspective

Abstract:     
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, G24

working papers series