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The Cost of Transacting

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... Most particularly this has been done by considering the dealer's optimization problem. Starting with the work of Garman [3], and continuing with Stoll [4], Ho and Stoll [5], O'Hara and Oldfield [6], and Amihud and Mendelson [7], the various elements of this problem and its consequences have gradually been elucidated [3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18,19,20,21,22,23,24,25,26]. For a more complete bibliography, see [1,2]. ...
... The bid-offer spread in dealer markets, as opposed to the double auction of this paper, has been studied empirically by [13,14,16,15,22,7,23,19,21,20,25]. These studies were motivated by debates on market design. ...
... The behavior of the spreads of the specialists on the NASDAQ vs. the dealers in the OTC was studied by [20], the spreads on the AMEX were compared with those of the NYSE by [25], and the issue of competitive dealing on the NYSE was studied by [15,21]. This field of study was in fact originated by Demsetz, who studied dealer spreads on the NYSE [13]. Each of these studies consisted of a linear regression applied to a large number of markets in individual stocks, and showed (among other things) that spreads have a negative gradient with deal rate, as we expect in our markets. ...
Preprint
We propose a series of simple models for the microstructure of a double auction market without intermediaries. We specialize to those markets, such interdealer broker markets, which are dominated by professional traders, who trade mainly through limit orders, watch markets closely, and move their limit order prices frequently. We model these markets as a set of buyers and a set of sellers diffusing in price space and interacting through an annihilation interaction. We seek to compute the purely statistical effects of the presence of large numbers of traders, as scaling laws on various measures of liquidity, and to this end we allow our model very few parameters. We find that the bid-offer spread scales as 1/DealRate\sqrt{1/{\rm Deal Rate}}.In addition we investigate the scaling of other intuitive relationships, such as the relation between fluctuations of the best bid/offer and the density of buyers/sellers. We then study this model and its scaling laws under the influence of random disturbances to trader drift, trader volatility, and entrance rate. We also study possible extensions to the model, such as the addition of market order traders, and an interaction that models momentum-type trading. Finally, we discuss how detailed simulations may be carried out to study scaling in all of these settings, and how the models may be tested inactual markets.
... Cost of immediacy ini merupakan biaya transaksi yang tidak dapat dihindari dalam suatu pasar yang tidak sempurna. Cost of immediacy tercermin pada besaran bid-ask spread (Demsetz, 1968). ...
... Beberapa studi empiris berikutnya mengembangkan temuan Demsetz (1968) tentang adanya biaya transaksi perdagangan dengan menganalisis lebih jauh komponen bid-ask spread yang meliputi order processing cost, inventory holding cost [Garman (1976), Stoll (1978), Amihud dan Mendelson (1980), Ho dan Stoll (1981)] dan adverse information cost [Bagehot (1971), Copeland dan Galai (1983), Glosten dan Milgrom (1985) dan Kyle (1985)]. ...
... Hasil penelitian Stoll (2000) mengenai hubungan antara spread dengan beberapa ukuran aktivitas perdagangan menyimpulkan bahwa quoted proportional spreads ((askbid price)/harga) berhubungan negatif dengan volume perdagangan dan harga saham, dan berhubungan posititf dengan volatilitas return. Hasil penelitian ini, konsisten dengan hasil penelitian sebelumnya yang dilakukan oleh Demsetz (1968) dan Tinic (1972. Penelitian mengenai topik yang sama di Indonesia dilakukan oleh Ekaputra (2006) dan menyimpukan bahwa variabel harga saham, volatilitas return, dan volume transaksi berpengaruh secara signifikan terhadap spread. ...
Article
The sources of trading friction are studied, robust empirical measures of friction are provided. Four distinct measures of trading friction are computed from transactions data for 200 IDX stocks. Each observation for a company is an average over the 245 daily observations.All friction measures are expressed as a percentage of the average price (mentioned as the proportional half spread). The degree to which the various measures of trading frictions are associated with each other and with trading characteristics of stocks is examined. All the total friction measures are strongly related to the same variables in the same way. For association of trading friction with trading characteristics, the independent variables are the log of the average daily dollar volume, the stock's, the log of the average closing price and the log of the average number of trades per day. Quoted, effective and traded half spread measures decrease in number of trades, average daily dollar volume and stock price, and these variables are statistically significant in Indonesian Stock Exchange.
... asymmetry in the financial market and diminishing investor trading appetite (Schoenfeld, 2017). Conversely, transaction costs theory argues that the increased volume of transactions by investors in their portfolios offsets weaker transaction costs, thereby enhancing stock market liquidity (Demsetz, 1968). As the direction of this relationship remains unclear, investigating the channels through which EPU affects stock liquidity continues to be a theoretical and empirical question warranting further exploration. ...
... This finding is based also on transaction cost theory, which argues that the increasing volume of operations conducted by investors in their portfolios leads to lower transaction costs, thereby enhancing stock market liquidity (Demsetz, 1968). Additionally, Yeyati et al. (2008) identify two types of stylized findings: market downturns are negatively correlated with trading costs and positively correlated with trading volume. ...
... Table 3 presents the outcomes of the multiple regression models using the panel GLS method. We find a positive and significant relationship between EPU and trading volume (Column 1), corroborating Demsetz's (1968) transaction costs theory. ...
Article
Purpose The study examines the relationship between Economic Policy Uncertainty (EPU) and stock liquidity, and the mediating role of investor sentiment. Design/methodology/approach This study draws on a sample of 4,620 firm-year observations covering nonfinancial firms in the United States from 2007 to 2020. We employ multiple regression analysis with panel data and path analysis with Structural Equation Modeling (SEM) to examine the impact of EPU on stock liquidity in detail. Findings EPU significantly enhances stock liquidity. However, at elevated levels of EPU, this relationship reverses. The path analysis results indicate that EPU positively affects stock liquidity via the investor sentiment channel. This sentiment partially mediates the relationship between EPU and both trading volume and turnover rate, and fully mediates the relationship between EPU and both turnover price impact and illiquidity. Practical implications Our findings underscore the importance of liquidity for investors, who may require higher returns for holding more illiquid stocks. Second, they can help the government understand the implications of changes in EPU, highlighting the need for clear communication and the implementation of appropriate capital market policies. Originality/value While considerable research focuses on the relationship between EPU and stock market liquidity, the analysis of the channels through which EPU influences stock market liquidity remains largely unexplored. Our study highlights the importance of investor sentiment in explaining this relationship.
... Pemahaman terdahulu mengenai likuiditas diawali oleh hadirnya konsep equillibrium dari Walras yang dikenal dengan "Walrasian Fiction Auctioneer", dimana equillibrium pasar terbentuk dari kekuatan sisi permintaan dan penawaran dengan beberapa asumsi diantaranya pasar selalu dalam keadaan keseimbangan, perfectly liquid, tidak ada biaya transaksi, tidak ada pajak atas imbal hasil dan adanya informasi yang sama yang diterima investor (symmetric information). Perkembangan berikutnya mengenai pembentukan harga keseimbangan menyatakan bahwa keseimbangan harga pada kenyataannya tidak selalu terjadi (Demsetz, 1968). Keseimbangan dapat diperoleh dengan menyepakati suatu harga tertentu sebagai cost of 1 Likuiditas dapat ditinjau dari beberapa aspek yaitu tightness, depth, resiliency dan immediacy (Kyle (1985), Harris (2003)]. ...
... 2 Cost of immediacy adalah biaya yang berhubungan dengan kecepatan tereksekusinya perdagangan (immediate execution of trading). Analisis Demsetz (1968) dianggap sebagai awal munculnya teori market microstructure. Demsetz mengemukakan dua hal yang tidak dinyatakan dalam pandangan sebelumnya yaitu biaya perdagangan baik biaya eksplisit maupun implisit dan dimensi waktu (saat dimana jumlah seller sama dengan jumlah buyer). ...
... Perkembangan mengenai pembentukan harga keseimbangan dan eksistensi biaya transaksi, diawali oleh pandangan Demsetz (1968) yang menyatakan bahwa keseimbangan antara jumlah penjual dan pembeli pada kenyataannya tidak selalu terjadi, sehingga sulit mencapai market clearing price. Ketidakseimbangan ini dapat diatasi dengan menyepakati suatu harga tertentu sehingga eksekusi dapat dilakukan. ...
Article
The main purpose of this research is to measure trading friction for high frequency financial data at Bursa Efek Indonesia (BEI) and to adjust trading friction to estimate expected return in capital asset pricing model. Trading friction could be measured by quoted half spread, effective half spread, traded half spread and proportional half spread. This research defines trading friction as the difficulties faced by investors in the stocks trading which is sourced from implisit transaction cost. The sources of trading friction are real friction dan informational friction. Based on calculations, it is known that the highest trading frictions derived from the information. These results prove that the average trading friction is equal to 2,35% per year. The estimation results of the expected return on the capital asset pricing model that takes into account the trading frictions can explain the existence of a positive relationship between beta with the expected return on the entire observation period. Through compare mean test before and after adjustment using either proportional quoted half spread or proportional effective half spreads, it can be proved that the trading frictions lead to an increase in the beta.
... Стіглер, М.Спенсе) [12], [13], [14]. У фінансах трансакційні витрати розглядали у своїх дослідженнях Х.Демзец, Х.Столл, А. Краус, Л.Міллер [15], [16], [17]. В Україні питаннями трансакційних витрат та ринкової ліквідності займалися вчені А.Б. ...
... Одним з перших, хто розвинув теорію трансакційних витрат на рівні мікроструктури, був Г. Демсетз у статті «Витрати здійснення трансакції» [15]. Він обмежив своє дослідження вузьким означенням трансакційних витрат -як витрат здійснення обміну акцій на готівку. ...
... -як плати за нагальність та визначеність у здійсненні купівлі-продажу. Тобто, чим швидше інвестор прагне здійснити обмін, тим більшу плату він має здійснити за його виконання [15], [32], [33]. Причиною цього є як певні правила обміну на ринках обміну фінансових активів, так і переоцінка контрагентами відносної вартості активу за умови різкого зростання попиту; -як премія за участь у ринковій торгівлі та проведення обміну для стимулювання потенційних контрагентів. ...
Article
The article substantiates the origin of transaction costs of stock trading from the point of view of the microstructure of the stock market. The article is devoted to the problem of improving the efficiency of decision-making in the field of portfolio investment, in particular in terms of reducing the cost of conducting operations. The object is the microstructure of the stock market, which allows to study in detail the process of making transactions with securities. The origin of transaction costs of stock trading was determined from the point of view of the microstructure of the market: as an appropriate fee for urgency and certainty in the purchase and sale process; as the premium for participation in market trading and conducting the exchange to stimulate potential counterparties; as the result of potential discrepancy in terms of information that the participants of exchange operations have. The classification of transaction costs is systematized according to various criteria: clarity of identification and assessment (explicit – commissions of intermediaries and the stock exchange, taxes, etc.and implicit – costs of spread, timeliness, market impact, missed opportunities); according to the reason for the various transaction costs (taxes, commissions, transaction execution costs and costs of missed opportunities). It is established that implicit costs add a significant level of uncertainty to the investment decision-making process, and therefore their evaluation and control is a priority issue for the investment entity. The main approaches to quantification of implicit transaction costs – missed opportunity costs, spread costs, and market impact costs-are summarized. Prospects for improving the tools for estimating transaction costs of operations in organized stock markets are determined.
... Madhavan (2000) et Biais et al. (2005), à travers une revue de la littérature synthétique et complète, identifient deux générations de travaux en la matière.A leur origine, les recherches se sont essentiellement orientées vers l'élaboration d'une analyse alternative aux approches walrassiennes du marché financier, et ont été ainsi menées en contrepied de la vision normative d'un marché efficient, librement concurrentiel et exempt de tout coût de transaction. La littérature de première génération, en matière de microstructure, s'est donc concentrée sur les déterminants du prix des actifs, et notamment de la fourchette (spread).Partant du principe que l'échange de titres, pris dans sa dimension temporelle, implique la présence de décalages entre l'arrivée du flux d'ordres de vente et celle de flux d'achats qu'il faut nécessairement combler,Demsetz (1968) a ainsi formalisé les déterminants de la fourchette sur le New York Stock Exchange et défini cette dernière comme une prime de compensation des intermédiaires en retour d'un service de liquidité. Ces travaux ont ouvert la voie à de multiples extensions, essentiellement polarisées autour du comportement concurrentiel des teneurs de marché et du comportement stratégique des investisseurs. ...
... bjectif de développer l'attractivité de la place financière sous son administration en développant sa capacité de supervision afin d'éviter les comportements frauduleux. Les réglementations ont montrent qu'un marché fragmenté n'est pas viable et que les marchés des valeurs mobilières sont des monopoles naturels en raison des externalités du marché.Demsetz (1968), ...
... Aslan et al., 2011;Easley et al., 2012;Chang et al., 2014;Gan et al., 2015) . (e.g., Demsetez, 1968;Akerlof, 1970;Spence, 1973;Williamson, 1975;1985;2005;Stglitz, 2002;Schmidt and Keil, 2013;Andrew Bloomenthal, 2021 Chung et al, 1995;Coller and Yohn, 1997;Ferreira et al., 2011;Armstrong et al., 2012;Hwang et al., 2013;O'Hara, 2015; 'Hara, 1987;Easley et al., 1997a;1997b;2002;2012 (Bamber, 1987;Atias and Bamber, 1994;Bamber and Cheon, 1995;Bamber et al., 1997;Bamber et al.,2011 Kim and Verrecchia (1991; Bamber, 1987;Kim and Verrecchia, 1991;Atiase and Bamber, 1994; (e.g., Lu, 2012;Wang, 2013;Lara et al., 2014;Yassin et al., 2015;Ahmed and Ali, 2015;Isniawati et al., 2018;Shehata and Rashed, 2021 Bamber et al., 2011;Bhattacharya et al., 2008;Rapp, 2010;Shehata and Rashed, 2021;Ayagi, 2023;Lof and Bommel, 2023 (e.g., Beaver, 1968;Heflin et al., 2005;Bhattacharya et al., 2008;Ajward and Takehara, 2011 (e.g., Beaver, 1968;Demsetz, 1968;Glosten and Harris, 1988;Easley et al., 2002;Easley and O'Hara, 2002;Aslan et al., 2011;Chang et al., 2014;Gan et al., 2015;Petchey et al., 2016; ) ‫ن‬ ‫تعقيدا‬ ‫األقؿ‬ ‫األخرل‬ ‫النماذج‬ ‫بعض‬ ‫اجد‬ ‫تك‬ ‫كمع‬ ، ‫الفعاؿ‬ ‫أك‬ ‫المؤثر‬ ‫السعر‬ ‫معدؿ‬ ‫نمكذج‬ ‫مقدمتيا‬ ‫في‬ ‫يأتي‬ ‫التي‬ ‫ك‬ (e.g., Huang and Stoll, 1996;Bessembinder and Kaufman, 1997;Stoll,2000;Venkataraman,2001;Bessembinder,2003;Bhattacharya et al., 2008 (e.g., Kiger, 1972;Bamber, 1987;Bamber et al., 2011;Lof and Bommel; Bamber, 1987;Bamber and Cheon, 1995;Bamber et al., 1997; (e.g., Beaver, 1968;Ryan and Taffler, 2004;Bamber et al., 2011 Demsetz, 1968;Glosten and Harris, 1988;Easley and O'Hara, 1987;Easley et al., 2002 ) ‫كعمى‬ . Engle and Russel, 1997;Bauwens and Giot, 2003;Tay et al., 2009;Aktas et al., 2007;Lin and Ke, 2011;Okay et al., 2012;Petchey et al., 2016 Beaver, 1968, Ziebart, 1990Bamber et al., 2011;Fosu et al., 2016;Lof and Bommel, 2023 Welker, 1985;Diamond and Verrecchia, 1991;Healy et al., 1999;Heflin et al;2005 ...
... Aslan et al., 2011;Easley et al., 2012;Chang et al., 2014;Gan et al., 2015) . (e.g., Demsetez, 1968;Akerlof, 1970;Spence, 1973;Williamson, 1975;1985;2005;Stglitz, 2002;Schmidt and Keil, 2013;Andrew Bloomenthal, 2021 Chung et al, 1995;Coller and Yohn, 1997;Ferreira et al., 2011;Armstrong et al., 2012;Hwang et al., 2013;O'Hara, 2015; 'Hara, 1987;Easley et al., 1997a;1997b;2002;2012 (Bamber, 1987;Atias and Bamber, 1994;Bamber and Cheon, 1995;Bamber et al., 1997;Bamber et al.,2011 Kim and Verrecchia (1991; Bamber, 1987;Kim and Verrecchia, 1991;Atiase and Bamber, 1994; (e.g., Lu, 2012;Wang, 2013;Lara et al., 2014;Yassin et al., 2015;Ahmed and Ali, 2015;Isniawati et al., 2018;Shehata and Rashed, 2021 Bamber et al., 2011;Bhattacharya et al., 2008;Rapp, 2010;Shehata and Rashed, 2021;Ayagi, 2023;Lof and Bommel, 2023 (e.g., Beaver, 1968;Heflin et al., 2005;Bhattacharya et al., 2008;Ajward and Takehara, 2011 (e.g., Beaver, 1968;Demsetz, 1968;Glosten and Harris, 1988;Easley et al., 2002;Easley and O'Hara, 2002;Aslan et al., 2011;Chang et al., 2014;Gan et al., 2015;Petchey et al., 2016; ) ‫ن‬ ‫تعقيدا‬ ‫األقؿ‬ ‫األخرل‬ ‫النماذج‬ ‫بعض‬ ‫اجد‬ ‫تك‬ ‫كمع‬ ، ‫الفعاؿ‬ ‫أك‬ ‫المؤثر‬ ‫السعر‬ ‫معدؿ‬ ‫نمكذج‬ ‫مقدمتيا‬ ‫في‬ ‫يأتي‬ ‫التي‬ ‫ك‬ (e.g., Huang and Stoll, 1996;Bessembinder and Kaufman, 1997;Stoll,2000;Venkataraman,2001;Bessembinder,2003;Bhattacharya et al., 2008 (e.g., Kiger, 1972;Bamber, 1987;Bamber et al., 2011;Lof and Bommel; Bamber, 1987;Bamber and Cheon, 1995;Bamber et al., 1997; (e.g., Beaver, 1968;Ryan and Taffler, 2004;Bamber et al., 2011 Demsetz, 1968;Glosten and Harris, 1988;Easley and O'Hara, 1987;Easley et al., 2002 ) ‫كعمى‬ . Engle and Russel, 1997;Bauwens and Giot, 2003;Tay et al., 2009;Aktas et al., 2007;Lin and Ke, 2011;Okay et al., 2012;Petchey et al., 2016 Beaver, 1968, Ziebart, 1990Bamber et al., 2011;Fosu et al., 2016;Lof and Bommel, 2023 Welker, 1985;Diamond and Verrecchia, 1991;Healy et al., 1999;Heflin et al;2005 ...
... In this paper, we interact HL x_y with price direction/return sign (RS x_y ). The second measure, the BAS, is the difference between Px_Ask and Px_Bid and is the cost of buying and selling government bonds (Demsetz, 1968;Amihud and Mendelson, 1986). This difference represents a transaction fee (Demsetz, 1968). ...
... The second measure, the BAS, is the difference between Px_Ask and Px_Bid and is the cost of buying and selling government bonds (Demsetz, 1968;Amihud and Mendelson, 1986). This difference represents a transaction fee (Demsetz, 1968). The smaller the price gap, the more liquid the market is, and vice versa (Foucault et al., 2005). ...
Article
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We study repo haircut determinants and develop the haircut calculation model. Collateral securities are government and corporate fixed-incomes, and we examine the determinants in Indonesia, Malaysia, Thailand, and Hong Kong. Implementing the Generalized AutoRegressive-Conditional Heteroskedasticity (GARCH) process, we find that the changes in long-memory returns, liquidities, and currency influence haircuts. Then, we introduce the haircut model using the historical and parametric Value-at-Risk (VaR), burdening the borrower as much as the α-percentile collateral loss. When borrowers default, lenders get the collaterals and haircuts to compensate for the collateral-price change.
... 66 See Demsetz (1968a;1968b). ...
Article
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Ronald Coase famously exposed the limitations of economic analyses that rely upon assumptions of frictionless markets. He highlighted the importance of including transaction costs in economic analyses and issued a challenge to economists to think seriously about how transaction costs affect economic systems. Harold Demsetz, extended Coase’s analysis to show how these costs alter the way firms price and market their products. Demsetz’s analysis underscored that the costs of providing a market sometimes exceed the benefits of creating one in the first place and examined conditions where transaction costs imply that zero amounts of explicit market pricing will be efficient. This article extends Demsetz’s insights with respect to non-linear pricing contracts that seem not to “price” key side effects of the economic exchange. In particular, we analyze the welfare and output effects of two examples of such contracts that are commonly used by firms that are frequently subject to antitrust scrutiny: metered pricing; and loyalty discounts. The analysis demonstrates how a firm’s choice to set prices for its products are influenced by transaction and information costs and examines whether changes in output that are caused by the use of these non-linear pricing schemes are positively correlated with changes in total and consumer welfare. The article then discusses conditions under which measuring output effects can reliably differentiate between welfare-increasing and welfare-reducing uses of non-linear pricing.
... According to Demsetz (1968), who assumed that liquidity depends on dealers' financing costs and inventory risk, the initially chosen explanatory variables for liquidity in a study performed by Chordia, Roll and Subrahmanyan (2000a) were short-/long-term interest rates, default spreads (generated from market volatility), and contemporaneous moves. Moreover, market-wide changes in liquidity were likely to occur immediately before official announcement events, e.g. ...
Research Proposal
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Risk Management: Financial and Econometrics Models for Credit Risk Management.
... Indeed, such a definition lacks precision given that it is related to how we define "quickly" and "significant price effect" per se [7]. However, and in a brief overview [8], liquidity could be seen as the risk investors bear for not being able to readily transfer ownership of a given security, which is one of the main characteristics used by the financial services industry (Amihud and Mendelson, 1986;Demsetz, 1968;Ho and Stoll, 1981;Keene, 2007). From a general perspective, the stability of the financial system as a whole benefits fromif not subject toliquidity (Wuyts, 2007). ...
Article
Purpose This study aims to address gaps and limitations in the literature on corporate governance and stock liquidity. It explores the potential benefits of increasing female representation in corporate leadership, which has been a subject of debate and policy intervention in recent years. Design/methodology/approach Based on prior empirical studies and by integrating the insights of different theories, this study links gender diversity to stock liquidity and uses a multivariate panel regression approach. Findings The results show that gender diversity, both on the board and in executive positions, positively and consistently affects stock liquidity across different business cycles. The findings reinforce the notion that diverse executive leadership is crucial and influential irrespective of the prevailing economic conditions. Practical implications This study has practical implications for investors, managers and policymakers who are interested in the benefits of gender diversity in corporate leadership. It suggests that increasing the percentage of female executives and board members can improve stock market liquidity, which is a key indicator of market efficiency and firm value. Social implications This study advocates for gender equality and diversity in corporate leadership, which can benefit society. It demonstrates that the presence of women directors can enhance financial stability and thus benefit the stakeholders and the community. Originality/value This study contributes to the academic literature by examining the impact of gender diversity on board and executive levels on stock liquidity in the US market. Previous research on this topic has mainly relied on French or Australian data. Moreover, this study extends previous work through examining the case of executives’ gender diversity. To the best of the authors’ knowledge, this study is the first to analyze the relationship between gender diversity and stock liquidity across different business cycles, providing a nuanced understanding of how economic contexts affect this relationship.
... In contrast, the trading hypothesis posits that when the institutional investors increase trading frequency and rebalance their portfolios more often, it substantially brings down the transaction costs and supplies the stock liquidity (Demsetz, 1968;Merton, 1987;E. W. Sun et al., 2014). ...
Article
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This research investigates whether institutional ownership contributes to enhancement of stock liquidity in emerging markets. The study examines data of listed companies on the Vietnamese stock market. Using a comprehensive data set for all stocks listed on Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) from 2008 to 2017, the statistical findings consistently demonstrate that institutional ownership has a negative impact on stock liquidity. In other words, the empirical evidence supports the adverse selection hypothesis that the upward trend of institutional ownership could reduce stock liquidity because the institutional investors with superior and advantageous information could exacerbate informational asymmetry issues. By using a case study in Vietnam, this research makes an original contribution to the academic literature by examining the relationship between institutional investors and stock liquidity in emerging markets. In addition, this study offers policymakers, authorities, agencies, and managers some insightful recommendations and implications that will help to not only promote the active participations of professional institutions but also improve stock liquidity, fairness, and efficiency.
... Generally speaking, there is evidence from two different literature streams that increased disclosures have a negative impact on the costs of equity financing. Demsetz (1968), Copeland and Galai (1983), Glosten and Milgrom (1985), Amihud and Mendelson (1986), Diamond and Verrecchia (1991) all base their arguments on the increased stock market liquidity; Botosan (2006), Barry and Brown (1985), Coles and Loewenstein (1988), Handa and Linn (1993) all base their arguments on the decreased non-diversifiable estimation risk. According to the previous literature stream, companies would attract more long-term investors if they disclosed more corporate information. ...
... After matching by the time of listing in the same calendar year, we use share price, return volatility, daily dollar trading volume, and market capitalization to match the listing for the non-U.S. and U.S. IPO stocks. We use these firm characteristics variables for matchings because Demsetz (1968) shows that spreads are positively related to price, market capitalization, and dollar trading volume and Lin et al. (1995) and Huang and Stoll (1996) document that spreads increase with trade size. ...
Article
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We investigate liquidity and information asymmetry for a sample of non-U.S. stock listings and U.S. IPO listings on the NYSE. We find that non-U.S. stock listings tend to have wider spreads, larger price impact of trades, and higher probability of information-based trading than those of the U.S. IPOs. In addition, our results show that the differences in liquidity and information asymmetry are not transient; it has a long-term implication. Furthermore, liquidity and information asymmetry measures for non-U.S. stock listings are significantly related to the macro-institutional quality of their home countries such as political risk and absence of violence/terrorism, government effectiveness, voice and accountability, control of corruption, and rule of law. We find that non-U.S. stocks from countries with lower institutional quality metrics tend to have lower liquidity and higher information asymmetry. Therefore, improving a country’s institutional quality alleviates information problems and improves market liquidity for non-U.S. stocks listed in NYSE.
... In the empirical literature, it is shown that price, trading activity, and volatility are major factors that affect liquidity (Demsetz, 1968;Tinic, 1972;Stoll, 1978bStoll, , 2000Menyah and Paudyal, 1996). ...
Preprint
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We investigate the influence of the firm value on the relationship between equity trading activity, market liquidity and return volatility at the portfolio level. For the different firm-value portfolio, we find that trading activity is negatively associated with liquidity but it is positively associated with volatility so higher trading activity leads to more volatile returns. For the very largest firm-value portfolio, the volatility-liquidity relationship is negative. However, this relationship is positive for other portfolios.
... According to Boulton, Braga-Alves, and Kulchania (2014), the bid-ask spread is the primary measure of transaction costs in the microstructure literature. Demsetz (1968) argues that the bid-ask spread compensates investors for supplying liquidity to the market. ...
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The cryptocurrency crash on the 5th of September, 2018, resulted in price decreases in 95 of the 100 leading digital currencies. We obtained millisecond data of some of the more prominent cryptocurrencies–bitcoin, ethereum, ripple, bitcoin cash and eos–and some of the smaller cryptocurrencies–neo, nem, omg, tezos and lisk–that were most affected in the crash and investigated what caused the digital market to collapse. We find that the behaviour of the more prominent cryptocurrencies and bitcoin, in particular, was the dominant factor behind the crash. We also find that smaller cryptocurrencies followed the behaviour of the larger ones in the crash. Furthermore, our empirical findings show that the trading behaviour of cryptocurrency traders (CTs) did not trigger the digital market crash. We propose the introduction of a single-cryptocurrency circuit breaker most prominent largest cryptocurrency–bitcoin–that will halt trading during market disruptions.
... The main reason for the emergence of legal institutions is the inherent cost of legal and economic transactions: the allocation of property rights always occurs under positive transaction costs (Coase, 1937(Coase, , 1960Demsetz, 1968;Williamson, 1979). ...
Thesis
This dissertation is about collective action issues in common property resources. Its focus is the "threshold hypothesis", which posits the existence of a threshold in group size that drives the process of institutional change. This hypothesis is tested using a six-century dataset concerning the management of the commons by hundreds of communities in the Italian Alps. The analysis seeks to determine the group size threshold and the institutional changes that occur when groups cross this threshold. There are five main findings. First, the number of individuals in villages remained stable for six centuries, despite the population in the region tripling in the same period. Second, the longitudinal analysis of face-to-face assemblies and community size led to the empirical identification of a threshold size that triggered the transition from informal to more formal regimes to manage common property resources. Third, when groups increased in size, gradual organizational changes took place: large groups split into independent subgroups or structured interactions into multiple layers while maintaining a single formal organization. Fourth, resource heterogeneity seemed to have had no significant impact on various institutional characteristics. Fifth, social heterogeneity showed statistically significant impacts, especially on institutional complexity, consensus, and the relative importance of governance rules versus resource management rules. Overall, the empirical evidence from this research supports the 'threshold hypothesis'. These findings shed light on the rationale of institutional change in common property regimes, and clarify the mechanisms of collective action in traditional societies. Further research may generalize these conclusions to other domains of collective action and to present-day applications.
... For market making, Demsetz [5] first proposed a theory, he pointed out the bid-ask spread is the compensation that markets provide for the immediacy of transactions. Then, Garman et al. [6] proposed an inventory based model for market making. ...
Preprint
Market making (MM) is an important research topic in quantitative finance, the agent needs to continuously optimize ask and bid quotes to provide liquidity and make profits. The limit order book (LOB) contains information on all active limit orders, which is an essential basis for decision-making. The modeling of evolving, high-dimensional and low signal-to-noise ratio LOB data is a critical challenge. Traditional MM strategy relied on strong assumptions such as price process, order arrival process, etc. Previous reinforcement learning (RL) works handcrafted market features, which is insufficient to represent the market. This paper proposes a RL agent for market making with LOB data. We leverage a neural network with convolutional filters and attention mechanism (Attn-LOB) for feature extraction from LOB. We design a new continuous action space and a hybrid reward function for the MM task. Finally, we conduct comprehensive experiments on latency and interpretability, showing that our agent has good applicability.
... Если бы в мировой литературе для обозначения ТрИз был принят вариант, который в период появления интереса к статьям Р. Коуза 1937 и 1960 гг. использовал Г. Демсец, а именно cost of transacting (Demsetz, 1968), вероятно, работы, призывающие дополнить трансакционные издержки (transaction cost) трансакционными выгодами (или трансакционной ценностью), не появились бы. Ведь термин, использованный Демсецом, ясно говорит о том, что речь идет об издержках, которые необходимы, чтобы произошел процесс осуществления трансакции, в то время как transaction cost такой явной трактовки не имеет. ...
Article
Full-text available
Although the theory of transaction costs has long been fruitfully used in the analysis of the economy, some of its aspects still have an ambiguous understanding among the researchers. The purpose of the article is to analyze such alternative interpretations. It is shown that transaction costs include mainly accounting components, and in some cases also subjective estimates of opportunity costs. Based on the analysis of the literature, the erroneous interpretation of transaction costs as unproductive has been demonstrated, and situations have been identified in which the minimization of transaction costs certainly contributes to the growth and development of the economy. The final section shows that the notion of transactional benefit (transactional value), which some researchers believe is a development of the theory of transaction costs, is in fact nothing more than another name for such a well-known concept as the benefits of joint activity, or the benefits of trade. It is shown that taking into account the benefits of joint activities and trade has always been part of the institutional analysis of the economy, starting with the work of R. Coase, D. North and O. Williamson, due to which the mentioned concept of transaction benefits is unlikely to make a meaningful contribution to the development of the theory of transaction costs.
... The asymmetric information between insiders and outsiders causes financing costs to rise (Myers, 1984;Myers and Majluf, 1984;Sanders and Boivie, 2004) and investment opportunities may be constrained by the limited internal funds. Prior studies (for example, Copeland and Galai, 1983;Demsetz, 1968;Amihud and Mendelson, 1986;Glosten and Milgrom, 1985) argue that extensive information disclosure can potentially reduce asymmetric information and in turn increase a firm's access to capital markets (or reduce financial constrains) by lowering the transaction costs or bid-ask spread. Another channel through which disclose is able to reduce asymmetric information is through reducing the non-diversifiable estimation risk (Coles and Loewenstein, 1988;Barry and Brown, 1985), and/or through increasing a company's trading liquidity (Diamond and Verrecchia, 1991). ...
Article
Purpose- In 2008 China issued the Measures for the Disclosure of Environmental Information. Using the introduction of this environmental policy, this paper examines how the environmental information disclosure quality affects a firm's access to capital markets. In particular, the relationship is investigated between the environmental disclosure quality and the investment-cash flow sensitivity, a measure of a firm's financial constraints, before and after the implementation of the policy. Methodology- The content analysis is used to construct the measure of environmental disclosure quality. First of all, the contents of both qualitative and quantitative environmental disclosures are analyzed with respect to the following ten areas reported in firms' annual reports: (1) corporate investment in environmental protection, (2) government financial support related to environmental control, (3) tax reductions related to environmental programs, (4) lawsuits, settlements, penalties, and rewards related to environmental protection, (5) emissions and pollution reduction implementation, (6) certifications of environmental programs, (7) firm environmental protection missions and goals, (8) firm environmental protection plans and strategies, (9) bank loans related to environmental protection, and (10) other environmental-related information. And then, different points are assigned based on the disclosure quality for each of the ten disclosure areas and aggregated to obtain an overall disclosure score. Univariate and regression tests are used to examine the relationship between environmental information disclosures and investment-cash flow sensitivity. Findings- A negative association is found between a firm's environmental disclosure quality and the investment-cash flow sensitivity after the policy was implemented, while no such association is found before the policy implementation. Furthermore, the observed reduction in investment-cash flow sensitivity tends to be stronger for firms in high-polluting industries. Conclusion- Given the environmental policies in emerging markets are often viewed with great doubts, our findings suggest that government environmental policy plays an important role in firm's access to capital markets. Keywords: Environmental information disclosure, investment-cash flow sensitivity, government policy, asymmetric information, financial constraints JEL Codes: G18, G30, G32
... Effective marketing and investor education are also important factors in the success of ETFs (Demsetz, 1968). In our country, many investors and even some participating securities companies and institutions have a vague understanding of the exchange-traded fund. ...
Article
Based on the trading data of A-share listed companies held by ETFs and the shareholding data of exchange-traded funds during 2011-2022 in China stocks markets, this paper uses the dynamic panel differential GMM model to study the shareholding ratio of exchange-traded funds and the impact of its changes on the liquidity of the underlying stocks. First, all the samples were regression and empirical results were analyzed. Then, the main board of Shanghai and Shenzhen, small and medium-sized board and growth enterprise board stocks were respectively regression to draw conclusions, and the robustness of the above research was tested. In the end, two main conclusions are drawn from the above research: (1) There is a significant positive correlation between the shareholding ratio of ETFs and stock liquidity, that is, the higher the shareholding ratio of ETFs, the higher stock liquidity. (2) The positive change of ETFs shareholding ratio will significantly increase the liquidity of the underlying listed companies' stocks. JEL classification numbers: G11. Keywords: Exchange-traded fund, Rate of return, Research and analysis.
Article
Prior literature documents a temporary spike in information asymmetry between sophisticated and unsophisticated traders around corporate disclosures because the former process new information faster. Using advances in textual analysis, we show that when management issues more uncertain financial statements, the resulting spike in information asymmetry is significantly lower than for firms that use less uncertain text. Furthermore, textual uncertainty measures of the disclosures are negatively associated with Intermarket Sweep Order (ISO) volume, an order type commonly used by sophisticated traders. This suggests sophisticated traders and algorithms are less able to extract value‐relevant information from financial disclosures when they are uncertain.
Preprint
In this paper, the optimal pricing strategy in Avellande-Stoikov's for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers' trading intensities, their optimal bid and ask prices and therefore their spreads are derived when the dealers are informed the severity of the competition. The effects of various parameters on the bid-ask quotes and profits of the dealers in a competitive market are also discussed. This study gives some insights on the average spread, profit of the dealers in a competitive trading environment.
Chapter
In traditional economics, market intermediary plays a very important role in solving adverse selection. Because of the existence of network ‘lemon’, in the network market where buyers and sellers can't fully solve the quality uncertainty, the market mechanism based on intermediary can be more effective than the market mechanism without intermediary or rule system.
Chapter
Details of the data collected and the reasons why these data were collected are presented. Data are for the New York Stock Exchange, the Philadelphia Stock Exchange, and the Boston Stock Exchange for the years 1830–1860. Data are from contemporary newspapers from 1830 to 1860. Data on the Price and the Volume of securities traded are collected. Data on the Bid and Ask Prices of securities are also collected. Literature review on the relationship between volume of trade and bid ask spreads is included. Details of the frequency of reporting, the methodology for calculating the size of an exchange, the methodology for calculating average bid ask spreads, and the sampling procedure used are explained.
Article
Market transparency, the ability of or extent to market participants to observe transactions and quotations, is a vital part of market designs as it profoundly influences the quality of price discovery and the behaviors of investors. Insufficient market information exposure is harmful to the transmission of price information and, therefore, the discovery efficiency of price, and questions fairness and justness by hampering other parties from timely acknowledging of transactions that may have detectable effects. In contrast, an over-transparent market may inappropriately expose traders’ pending trading interests, infringe upon their due interests, and distort their trading behavior. Especially when informational investors manage their limit-order exposure to hide their intent or manipulate the market, the market becomes less efficient. Therefore, practitioners and researchers keep debating about the best market design for transparency, including what information should be exposed, when exchanges should release information, and who should be acknowledged. The LDDS (Low-Latency Data Distribution System) of the SHSE (Shanghai Stock Exchange) introduced real-time distribution for quotation and withdrawal on May 10th, 2021, exposing all pending trading interests to subscribed investors and enabling them to rebuild the entire limit order book at no delay (in contrast, investors previously could only observe ten best price-offering at a frequency of three seconds per time). We investigate with this natural experiment how changes in pre-trade transparency will affect market quality and investor strategies. For this study, the Shenzhen exchange stocks make the perfect control group. Firstly, their market transparency remains unchanged during the investigation period after experiencing a similar transformation a decade ago. Secondly, the two exchanges share similar investor structures and market designs. Finally, there is no substantial segmentation between the two markets, as an investor can simultaneously trade in both exchanges with one broker account or with two subaccounts between which the investor can move money within a second. Therefore, control trails between the two exchanges may, to the greatest extent, neutralize the effect of exogenous factors and cross-exchange trends so we can come to a cleaner conclusion. We find that stocks in SHSE, after the introduction of real-time quotation and withdrawal information, experienced an insignificant change in liquidity measured by relative spread, a decrease in average order size, an increment in the proportion of marketable orders, and an addition in fast withdrawals. It is still an open question whether the market has become more efficient because of the lousy fitness of our regression. For stocks in the STAR market with high prices whose market transparency increased relatively more than the low-price counterpart, the improvement of market quality measured by liquidity and efficiency is especially significant, and statistics indicate the emergence of high-frequency trading activities such as short-term directional trades, market-making and layering.
Article
We investigate the relation between firms' business seasonality and their stock market liquidity and find robust evidence that firms with seasonal business tend to have less liquid equity. The effect of seasonality on stock liquidity is amplified for firms facing greater information asymmetry. Furthermore, firms with seasonal business patterns are associated with a higher probability of informed trading, and their stock returns co-move less with the market. Overall, our results suggest that the business patterns of such firms may negatively affect their information environments, and investors’ concerns with regard to adverse selection impede the liquidity provision for these firms.
Chapter
This chapter analyses the tortuous legal dispute relating to power purchase contracts signed by power utilities with three large power generation projects in coastal Gujarat, a Western Indian state. In the process, it attempts to answer the following questions: What are the circumstances that lead to demands for reopening of Power Purchase Agreements? Is the assumption that governments/government-owned entities always act in the public interest (in this case, consumer interest) borne out by evidence on the ground? Do regulatory judgements address consumer interests as mandated by the statute? What were the areas of convergence and divergence in the perspectives of various stakeholders on the issue of sanctity of contracts?
Article
This article investigates the consequences of price competition in public procurement on project-based firms' workplace safety by merging bidding data from the Florida Department of Transportation with the Occupational Safety and Health Administration workplace safety data. Our findings show that accidents decrease as the bid-estimate ratio decreases, implying an improvement in workplace safety. This counter-intuitive result is attributed to two facts. First, smaller firms' winning bids are less aggressive than those of larger firms due to financial constraints and a lack of economies of scale. Second, the marginal impact of a lower profit margin on workplace safety is more substantial for small firms than for larger firms, which reduces their capability to invest in workplace safety. Therefore, the low-bid system most negatively impacts the workplace safety of small firms. Our results have critical implications for State Transportation Agencies to incorporate safety data as one of the prequalification conditions and to provide incentives or other innovative mechanisms that help financially constrained firms maintain high workplace safety.
Article
We explore efficiency and optimal policy in decentralized transport markets, such as taxis, trucks, and bulk shipping. We show that in these markets, search frictions distort the transportation network and the dynamic allocation of carriers over space. We derive explicit and intuitive conditions for efficiency, and show how they translate into efficient pricing rules, or optimal taxes and subsidies for the planner who cannot set prices directly. The results imply that destination-based pricing is essential to attain efficiency. Then, using data from dry bulk shipping, we demonstrate that search frictions lead to a sizeable social loss and substantial misallocation of ships over space. Optimal policy can eliminate about half of the welfare loss. Can a centralizing platform, often arising as a market-based solution to search frictions, do better? Interestingly, the answer is no; although the platform eradicates frictions, it exerts market power thus eroding the welfare gains. Finally, we use two recent interventions in the industry (China’s Belt and Road Initiative and the environmental initiative IMO 2020) to demonstrate that taking into account the efficiency properties of transport markets is germane to any proposed policy.
Article
Full-text available
The current study aims at examining the impact of earnings management on equity liquidity in the Vietnam stock market when considering the direction of earnings management. We used two proxies of equity liquidity, namely quoted spread and effective spread, and analyzed the data using ordinary least squares (OLS), fixed and random effect models (FEM, REM), and regression with generalized least squares (GLS) to determine the most suitable model. The findings of the study indicate that when downward earnings management increases, the quoted spread also decreases, thus the bid-ask spread is low, meaning that the liquidity is high. This can be explained by the fact that when firms conduct downward earnings management to reduce taxes, investors may expect to buy stocks from these firms at a better price, leading to an increase in trading demand on the market. Whereas upward earnings management has no impact on quoted spread. Our results also showed that there is no evidence to suggest that earnings management has an impact on the effective spread. This means that, in the absence of other factors, an increase in earnings management in either upward or downward directions does not affect the difference between buying and selling prices.
Article
Full-text available
Since the future output of wind power generation is uncertain due to weather conditions, there is an increasing need to manage the risks associated with wind power businesses, which have been increasingly implemented in recent years. This study introduces multiple weather derivatives of wind speed and temperature and examines their effectiveness in reducing (hedging) the fluctuation risk of future cash flows attributed to wind power generation. Given the diversification of hedgers and hedging needs, we propose new standardized derivatives with higher-order monomial payoff functions, such as “wind speed cubic derivatives” and “wind speed and temperature cross-derivatives,” to minimize the cash flow variance and develop a market-trading scheme to practically use these derivatives in wind power businesses. In particular, while demonstrating the importance of standardizing weather derivatives regarding market liquidity and efficiency, we propose a strategy to narrow down the required number (or volume) of traded instruments and improve trading efficiency by utilizing the least absolute shrinkage and selection operator (LASSO) regression. Empirical analysis reveals that higher-order, multivariate standardized derivatives can not only enhance the out-of-sample hedge effect but also help reduce trading volume. The results suggest that diversification of hedging instruments increases transaction flexibility and helps wind power generators find more efficient portfolios, which can be generalized to risk management practices in other businesses.
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