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This paper studies Nasdaq market makers' activities during the one-and-half hour pre-opening period. Price discovery during the pre-opening is conducted via price signaling as opposed to the auction used to open the NYSE or the continuous market used during trading. In the absence of trades, Nasdaq dealers use crossed and locked inside quotes to signal to other market makers which direction the price should move. Furthermore, we #nd evidence of price leadership among market makers that bears little resemblance to their IPO#SEO lead underwriter participation. A fundamental issue in the study of market microstructure is the process through which new information is incorporated into security prices. Several mechanisms are known to exist. They include continuous markets, auction markets, price experimentation, and price signaling. The #nance literature has studied continuous markets extensively. For example, numerous theoretical papers have developed structural models which provide i...

Comments welcomed This paper tries to find a widely accessible measure of liquidity and studies its impact on asset pricing. Using trading turnover as a measure of liquidity and the 1976-1993 Tokyo Stock Exchange data, I find that, cross-sectionally, stocks with higher turnover tend to have a lower expected return. This evidence is consistent with predictions derived from an Amihud-Mendelson type of transaction cost model in which the turnover measures investors ’ trading frequency. The trading frequency hypothesis also predicts that the cross-sectional expected return is a concave function of the turnover and the time-series expected return is an increasing function of the turnover. The Japanese data supports both predictions. 1.

R. Stoll Market microstructure deals with the purest form of financial intermediation-- the trading of a financial asset, such as a stock or a bond. In a trading market, assets are not transformed but are simply transferred from one investor to another. The field of market microstructure studies the cost of trading securities and the impact of trading costs on the short-run behavior of securities prices. Costs are reflected in the bid-ask spread (and related measures) and in commissions. The focus of this chapter is on the determinants of the spread rather than on commissions. After an introduction to markets, traders and the trading process, I review the theory of the bid-ask spread in section II and examine the implications of the spread for the short run behavior of prices in section III. In section IV, the empirical evidence on the magnitude and nature of trading costs is summarized, and inferences are drawn about the importance of various sources of the spread. Price impacts of trading from block trades, from herding or from other sources, are considered in section V. Issues in the design of a trading market, such as the functioning of call versus

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We propose an empirical study on the pricing effect of liquidity level and liquidity risk in the credit default swaps (CDS) market. CDS is the key constituent of the fast growing credit derivatives market that has $34.4 trillion in total notional value by the end of 2006. Credit derivatives play an important role in today’s financial market by facilitating the transfer of credit risk. Credit derivatives are over-the-counter contracts executed through bilateral search. Trading motives include both credit risk management and, probably more notably, informed speculation. Government regulators around the globe have repeatedly expressed their concerns over the opacity and lack of comprehension of the credit derivatives market. A better understanding of the liquidity structure and its impact on the pricing of credit derivatives is critical to improving the efficiency and stability of financial markets and the overall health of the economy, as evidenced by the ongoing subprime mortgage crisis. Our study represents the first systematic investigation of the effect of CDS liquidity charac-teristics and liquidity risk on CDS spreads, above and beyond the credit risk component. We first construct a set of liquidity proxies to capture various facets of CDS liquidity, such as ad-verse selection, search frictions, and inventory costs, using a comprehensive database on CDS

The paper compares the dynamics of global, country and industry effects in firm level returns between emerging and mature markets. Based on 1,893 firms in MSCI global index from 1990 to 2002 from 37 countries our results show that the global and industry effects are still dominated by the country effects in emerging markets in contrast to developed markets. The results are robust to controlling for variables which might have significant impact on firms ’ factor effects, such as the firm’s business globalization, financial market integration and TMT sector affiliation. Our findings have important implications for international portfolio diversification.

This paper considers a new research topic within corporate governance; namely the impact of corporate governance variables on the stock market reaction to company speci…c news. This topic is important for a range of stakeholders, but especially investors, because one of the key concerns of corporations is the returns to shareholders and news (and the way it is managed) has the potential to impact on these returns. As the market reaction to news can now, given all the advances in electronic order books and the electronic transmission of news, be almost instantaneous, the analysis of the current research question has necessitated the use of the latest developments in the market microstructure literature. For a sample of ‘smaller cap’companies in the UK, the study shows that a small group of corporate governance variables (board size, Chairman/CEO split, the presence of founding directors and directors having professional quali…cations) have explanatory power in terms of the market reaction to company speci…c news. The results of the paper point to the analysis of the impact of governance variables on the market reaction to news being a new and complementary research agenda within corporate governance. JEL Classi…cation: G34, G14

Preliminary work. Please do not quote or circulate without permission. The paper has benefited from the comments of Gordon Fuller and seminar participants at the