We explore the sharp uptrend in recent trading activity and accompanying changes in market efficiency. Higher turnover has been associated with more frequent smaller trades, which have progressively ...formed a larger fraction of trading volume over time. Evidence indicates that secular decreases in trading costs have influenced the turnover trend. Turnover has increased the most for stocks with the greatest level of institutional holdings, suggesting professional investing as a key contributor to the turnover trend. Variance ratio tests suggest that more institutional trading has increased information-based trading. Intraday volatility has decreased and prices conform more closely to random walk in recent years. The sensitivity of turnover to past returns has increased and cross-sectional predictability of returns has decreased significantly, revealing a more widespread use of quantitative trading strategies that allow for more efficient securities prices.
Market Fragmentation Chen, Daniel; Duffie, Darrell
The American economic review,
07/2021, Letnik:
111, Številka:
7
Journal Article
Recenzirano
We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of ...price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders’ private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative.
Common shocks in stocks and bonds Cieslak, Anna; Pang, Hao
Journal of financial economics,
11/2021, Letnik:
142, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We propose an approach to identify economic shocks (monetary, growth, and risk premium news) from stock returns and Treasury yield changes, which allows us to study the drivers of asset prices at a ...daily frequency since the early 1980s. We apply the identification to examine investors' responses to news from the Fed and key macro announcements. We uncover two risk premium shocks-time-varying compensation for discount rate and cash flow news-which have distinct effects on stocks and bonds. Since the mid-1990s, the Fed-induced reductions in both risk premium sources have generated high average stock returns but an ambiguous response in bonds on FOMC days.
We examine how corporate insiders’ cognitive ability (IQ) affects their decisions to time insider and outsider trading before abnormal stock price changes. Our analysis of archival data on male ...corporate insiders in Sweden shows they are less prone to time their insider selling and to sell in larger amounts, before abnormal stock price declines as IQ increases. We also find that insiders with a higher IQ are better at timing their outsider buying. Taken together, our results show that corporate insiders’ IQ affects their trading decisions differently, depending on whether they are trading in their insider or outsider stocks.
Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. ...This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.
ABSTRACT
We hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower‐priced stocks. ...Consistent with such non‐proportional thinking, we find a doubling in price is associated with a 20% to 30% decline in volatility and beta (controlling for size/liquidity). To identify a causal price effect, we show that volatility jumps following stock splits and drops following reverse splits. Lower‐priced stocks also respond more strongly to firm‐specific news. Non‐proportional thinking helps explain asset pricing patterns such as the size‐volatility/beta relation, the leverage effect puzzle, and return drift and reversals.
Stocks with recent past high idiosyncratic volatility have low future average returns around the world. Across 23 developed markets, the difference in average returns between the extreme quintile ...portfolios sorted on idiosyncratic volatility is
-
1.31
%
per month, after controlling for world market, size, and value factors. The effect is individually significant in each G7 country. In the United States, we rule out explanations based on trading frictions, information dissemination, and higher moments. There is strong covariation in the low returns to high-idiosyncratic-volatility stocks across countries, suggesting that broad, not easily diversifiable factors lie behind this phenomenon.
We document the frequent use of lockup agreements in seasoned equity offerings (SEOs) and examine the determinants of their use, duration, and early release. We find that the likelihood of an SEO ...lockup and its duration are positively related to issuer information asymmetry measures. Lockup duration is negatively related to underwriter spreads and underpricing, indicating that lockups lower expected flotation costs. Lockups are frequently released early following share prices rises. We conclude that lockups represent a contracting solution to asymmetric information and agency problems that plague equity issues by helping to insure SEO quality and deter opportunistic insider trading.
We show that stock prices of firms with gender-diverse boards reflect more firm-specific information after controlling for corporate governance, earnings quality, institutional ownership and ...acquisition activity. Further, we show that the relationship is stronger for firms with weak corporate governance suggesting that gender-diverse boards could act as a substitute mechanism for corporate governance that would be otherwise weak. The results are robust to alternative specifications of informativeness and gender diversity and to sensitivity tests controlling for time-invariant firm characteristics and alternative measures of stock price informativeness. We also find that gender diversity improves stock price informativeness through the mechanism of increased public disclosure in large firms and by encouraging private information collection in small firms.
► Gender-diverse boards increase transparency. ► Board gender diversity is a substitute for other forms of corporate governance. ► Board gender diversity increases public disclosure in large firms. ► Board gender diversity encourages private information in small firms.
The financialization of the energy market has capacitated energy commodities to affect economic activities unfathomably. Despite the availability of rich literature investigating crude oil and ...developing its strong ties with economic and financial stability and climate change, little attention has been paid to natural gas (NG or LNG) and its potential to affect economies. Natural gas is not merely an alternative fossil fuel and a substitute for crude oil but it also presents huge advantages in terms of cost and low carbon emission. This study contributes to the literature and provides meaningful evidence on how changes in natural gas futures prices affect the equity returns in G-5 economies using the data covering almost two decades. Our results present a few exciting insights. First, we find that oil and gas prices are weakly correlated and do not reflect the dependence of gas on oil as reported in previous studies. Second, we find that although gas price changes negatively affect equity market returns in the short run, it subsides substantially in the long run. Holistically, our findings identify the hedging potential that natural gas provides to cope with the volatility in crude oil prices. We also assert that substituting oil with natural gas may improve the sustainability and stability of financial markets in G-5 economies.
•As opposed to crude oil, little attention has been paid to natural gas (NG) and its potential to affect economies.•We provide evidence on how NG prices affect the equity returns in G-5 economies covering the data for almost two decades.•Surprisingly, we find that NG prices are weakly correlated with and do not depend on oil as reported in previous studies.•We find that the negative short-run effect of gas prices subsides substantially in the long run.•Our findings identify the hedging potential that natural gas provides to cope with the volatility in crude oil prices.
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