In a market with informationally connected traders, the dynamics of volume, price informativeness, price volatility, and liquidity are severely affected by the information linkages every trader experiences with his peers. We show that in the presence of information linkages among traders, volume and price informativeness increase and liquidity improves. Moreover, we find that information linkages boost or damage the traders ’ profitsaccordingtowhether these linkages convey negatively or positively correlated signals. Finally, our model predicts patterns of trade correlation consistent with those identified in the empirical literature: trades generated by “neighbor ” traders are positively correlated and trades generated by “distant” traders are negatively correlated.

ABSTRACT This paper describes and analyses the history of the fundamental equation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rule-following but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goal of finding a solution to the problem of option pricing analogous to existing exemplary solutions, notably the Capital Asset Pricing Model, which had successfully been applied to stock prices. Third, the central strands of work on option pricing, although all recognizably ‘orthodox ’ economics, were not unitary. There was significant theoretical disagreement amongst the pioneers of option pricing theory; this disagreement, paradoxically, turns out to be a strength of the theory. Fourth, option pricing theory has been performative. Rather than simply describing a preexisting empirical state of affairs, it altered the world, in general in a way that made itself more true.

Abstract: This paper proposes a framework to gauge the degree of volatility transmission among international stock markets by deriving tests for conditional independence among daily volatility measures. We suppose that asset prices follow a multivariate jump-diffusion process, and make no parametric assumption on the functional form of the drift, diffusive, and jump components. To check for conditional independence of asset A’s daily volatility given asset B’s daily volatility, we consider the integrated (relative) squared difference between two nonparametric conditional density estimates. The first estimate considers only information concerning asset A’s daily volatility, whereas the second estimate also includes information about asset B’s daily volatility. To proxy for the unobservable daily volatility, we employ model-free realized measures, allowing for both microstructure noise and jumps. We establish the asymptotic normality of the test statistic based on realized measures as well as the first-order validity of its bootstrap analog. In addition, we investigate volatility spillovers between the stock markets in China, Japan, and US from January 2000 to December 2005. The empirical evidence for spillovers seem stronger running from China to either Japan or US rather than vice-versa. Our findings are robust to different realized measures, conditioning sets, and

Abstract: The analysis of volatility transmission is not only essential to understand the information flow process, but also helps identifying the appropriate multivariate model for estimating and predicting volatility. In this paper, we develop formal statistical tools for testing conditional independence and noncausality that are suitable for checking for volatility spillovers in asset prices. We take a different route from the previous papers in the literature in that we make no parametric assumption on the stochastic volatility processes and on the form that they interrelate. In particular, our testing procedure is in two steps. In the first stage, we estimate the daily volatilities of the assets under consideration by means of realized measures under the mild assumption that asset prices follow continuous-time jump-diffusion processes with stochastic volatility. In the second step, we then test for conditional independence by checking whether the corresponding density restrictions hold for the nonparametric estimates of the volatility distributions. The asymptotic results that we derive entail some interesting contributions to the nonparametric literature by clarifying the impact of the realized volatility estimation error. We also contribute to the volatility transmission literature by empirically investigating volatility spillovers between the stock markets

This paper examines the emergence of corporate ownership in China from the final decades of the Qing empire in the late 19 th century to the early Republican period in the 1910s and 1920s. By analyzing the actual process of incorporation, the development of the legal and financial environment, in particular the role of the state, we ask whether the “top-down ” approach, in which the central government established a legal framework for corporate enterprise based on Western models and the assumption that it would work as it did for Western firms and markets, was a viable approach to the modernization of a financial system traditionally dominated by family businesses and economic state patronage. Using business records from turn-of-the-century Chinese corporate companies, this paper argues that the government’s “top-down ” approach, while clearly well-intentioned, created a framework which only insufficiently promoted the system of corporate capitalism in pre-war China. We would like to thank the National Bureau of Economic Research and the organizer of the project and editor of this volume, Randall Morck. We benefited from discussions with all the participants of the three

Vol. 2, No. 2 (January 2001)