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Report
Liquidity in U.S. fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets
We examine the determinants of the realized bid-ask spread in the U.S. corporate, municipal and government bond markets for the years 1995 to 1997, based on newly available transactions data. Overall, we find that liquidity is an important determinant of the realized bid-ask spread in all three markets. Specifically, in all markets, the realized bid-ask spread decreases in the trading volume. Additionally, risk factors are important in the corporate and municipal markets. In these markets, the bid-ask spread increases in the remaining-time-to maturity of a bond. The corporate bond spread also ...
Report
An analysis of brokers' trading with applications to order flow internalization and off-exchange sales
We study a variety of issues related to brokers' trading. In our model, multiple informed traders and noise traders trade through multiple brokers. Brokers may trade with their customers in the same transaction (simultaneous dual trading) or trade after their customers in a separate transaction (consecutive dual trading). With a fixed number of traders, and relative to consecutive dual trading, informed and noise traders are worse off, brokers are better off, and market depth is lower in the simultaneous dual trading market. When we endogenize the number of brokers, informed and noise traders ...
Report
Traders' broker choice, market liquidity and market structure
Hedgers and a risk-neutral informed trader choose between a broker who takes a position in the asset (a capital broker) and a broker who does not (a discount broker). The capital broker exploits order flow information to mimic informed trades and offset hedgers' trades, reducing informed profits and hedgers' utility. But the capital broker has a larger capacity to execute hedgers' orders, increasing market depth. In equilibrium, hedgers choose the broker with the lowest price per unit of utility while the informed trader chooses the broker with the lowest price per unit of the informed order ...
Report
Information asymmetry, market segmentation, and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares
In contrast to most other countries, Chinese foreign class B shares trade at an average discount of about 60 percent to the prices at which domestic A shares trade. We argue that one reason for the large price discount of B shares is because foreign investors have less information on Chinese stocks than domestic investors. We develop a model, incorporating both informational asymmetry and market segmentation, and derive a relative pricing equation for A shares and B shares. We show theoretically that an A share index security, tradable by foreigners, increases the liquidity of B shares. Our ...
Conference Paper
A re-examination of the role of relationships in the loan-granting process
We reexamine the role of relationships in the loan granting process overall. A practical implication emerging from the classical studies on the role of relationships in credit rationing is that good relationships between a borrower and his lender should, in fact, work to lower the interest rate charged to the borrower. We test this implication in our paper using a robust sample selection methodology that explicitly accounts for the entire fabric of the loan granting process, including a borrower?s decision to apply to the bank for a loan (or not), whether a bank approves the application for a ...
Report
Estimating the adverse selection and fixed costs of trading in markets with multiple informed traders
We investigate, both theoretically and empirically, the relation between the adverse selection and fixed costs of trading and the number of informed traders in a financial asset. As a proxy for informed traders, we use dual traders -- i.e., futures floor traders who execute trades both for their own and customers' accounts on the same day. Our theoretical model shows that dual traders optimally mimic the size and direction of their informed customers' trades. Further, the adverse selection (fixed) costs of trading: (1) decrease (increase) with the number of dual traders m, if dual traders are ...
Report
Estimating the adverse selection cost in markets with multiple informed traders
We investigate the relation between the number of informed traders in a financial asset and the estimated adverse selection cost of trading in that asset, lambda, after controlling for the effects of previously identified determinants of market liquidity. As a proxy for informed traders, we use dual traders in futures markets - i.e., floor traders who trade both for customers and their own accounts on the same day. We show, theoretically, that it is optimal for dual traders to mimic both the size and direction of their informed customers' orders. Using data from four selected futures ...
Report
Can competition between brokers mitigate agency conflicts with their customers?
We study competitive, but strategic, brokers executing trades for an informed trader in multi-period setting. The brokers can choose to (a) execute the order, as agents, first, and trade for themselves as dealers, afterwards; or (b) trade for themselves first and execute the order later. We show that the equilibrium outcome depends on the number of brokers. When the number of brokers exceeds a critical number (greater than one), the informed trader distributes his order (equally) among the available brokers. The brokers, in turn, execute the informed trader's order first and trade personal ...
Report
Can competition between brokers mitigate agency conflicts with their customers?
We study competitive, but strategic, brokers executing trades for an informed trader in a multi-period setting. The brokers can choose to (a) execute the order, as agents, first, and trade for themselves, as dealers, afterwards; or (b) trade for themselves first and execute the order later. We show that the equilibrium outcome depends on the number of brokers. When the number of brokers exceeds a critical number (greater than one), the informed trader distributes his order (equally) among the available brokers. The brokers, in turn, execute the informed trader's order first and trade personal ...
Report
Traders' broker choice, market liquidity and market structure
Hedgers and a risk-neutral informed trader choose between a broker who takes a position in the asset (a capital broker) and a broker who does not (a discount broker). The capital broker exploits order flow information to mimic informed trades and offset hedgers' trades, reducing informed profits and hedgers' utility. But the capital broker has a larger capacity to execute hedgers' orders, increasing market depth. In equilibrium, hedgers choose the broker with the lowest price per unit of utility while the informed trader chooses the broker with the lowest price per unit of the informed ...