This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over

Abstract not found

Abstract not found

We build a model that helps explain why increases in liquidity⎯such as lower bid-ask spreads, a lower price impact of trade, or higher turnover⎯predict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the information contained in order flow, thereby boosting liquidity. In the presence of short-sales constraints, high liquidity is a symptom of the fact that the market is dominated by these irrational investors, and hence is overvalued. This theory can also explain how managers might successfully time the market for seasoned equity offerings, by simply following a rule of thumb that involves issuing when the SEO market is particularly liquid. Empirically, we find that: i) aggregate measures of equity issuance and share turnover are highly correlated; yet ii) in a multiple regression, both have incremental predictive power for future equal-weighted market returns.

This paper examines newly-available intra-day data from the interdealer government bond market to investigate the effects of economic-news announcements on prices, trading volume, and bid-ask spreads. The use of this new data set together with data on market expectations allows us to obtain new and different results regarding which announcements are important relative to previous studies. In fact, this is the first paper to separate out the effects of concurrent announcements, the first to measure the intra-day price impact of announcements, and the first to study the effect of announcements on bid-ask spreads and trading volume. We find a total of seventeen economic announcements to have a significant impact on the price of at least one of the following instruments: a threemonth bill, a two- and ten-year note, and a thirty-year bond. Eight of them significantly affect all instruments. For announcements that have a significant impact on prices, the impact generally occurs within one minute after the announcement. We explore these effects further for the ten-year note and the three-month bill, for the announcements that significantly affect their prices. We find a strong association between announcements and trading volume. Bid-ask spreads widen immediately after most economic announcements, but then return to normal levels within 5 to 15 minutes. For almost all announcements, volatility is significantly higher after the

We thank the Island ECN for providing us with the data for this study, and are especially grateful for the help of Cameron Smith, Josh Levine, and Rob Newhouse. We also thank Tim McCormick and the NASD’s Economic Research for providing us with odd-lot data, and Lei Yu for her research assistance. For comments on an earlier draft we are indebted

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known as the study of securities market microstructure, deals with the behavior of participants in securities markets and with the effects of information and institutional rules on the economic performance of those markets. These institutional factors may arise from technology, tradition or regulation. Microstructure and its impact are important, because of the vast amounts of wealth which pass through securities markets — including the foreign exchange market — every day. Microstructure is of interest to students of the foreign exchange market: microstructural analyses of other markets have yielded insight into traders ’ behavior and the effect of various institutional

Stocks and other financial assets are traded at prices that lie on a fixed grid determined by the minimum tick size. Observed prices and quoted spreads do not correspond to the equilibrium prices and true spreads that would exist in a market with no minimum tick size. Using Monte Carlo Markov Chain methods, this paper estimates the equilibrium prices and true spreads. For large stocks, most of the quoted spread is attributable to the rounding of prices and the adverse selection component is small. The true spread and the adverse selection component are greater for mid-sized stocks.

Every finance professional employs the concept of market efficiency. The theory, evidence and counterevidence focus on a couple of dozen highly influential articles published during the twentieth century. We summarise the origins of and interlinkages between these contributions to the history of finance.