Quoting Activity and the Cost of Capital

46 Pages Posted: 24 Jul 2017 Last revised: 3 Apr 2020

See all articles by Ioanid Rosu

Ioanid Rosu

HEC Paris - Finance Department

Elvira Sojli

UNSW Australia Business School, School of Banking and Finance

Wing Wah Tham

University of New South Wales (UNSW)

Date Written: April 2, 2020

Abstract

We study the quoting activity of market makers in relation to trading, liquidity, and expected returns. Empirically, we find larger quote-to-trade (QT) ratios in small, illiquid or neglected firms, yet large QT ratios are associated with low expected returns. The last result is driven by quotes, not by trades. We propose a model of quoting activity consistent with these facts. In equilibrium, market makers monitor the market faster (and thus increase the QT ratio) in neglected, difficult-to-understand stocks. They also monitor faster when their clients are more precisely informed, which reduces mispricing and lowers expected returns.

Keywords: Quote-to-trade ratio, market making, liquidity, price discovery, monitoring, information acquisition, neglected stocks, inventory, high frequency trading

JEL Classification: G12, G14, D82

Suggested Citation

Rosu, Ioanid and Sojli, Elvira and Tham, Wing Wah, Quoting Activity and the Cost of Capital (April 2, 2020). Available at SSRN: https://ssrn.com/abstract=3005928 or http://dx.doi.org/10.2139/ssrn.3005928

Ioanid Rosu (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Elvira Sojli

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Wing Wah Tham

University of New South Wales (UNSW)

Kensington
High St
Sydney, NSW 2052
Australia

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