Award at the 2005 European Finance Association Meeting, to the retail broker and discount

We present a synthesis of all the available empirical evidence in the light of recent theoretical developments for the existence of characteristic log-periodic signatures of growing bubbles in a variety of markets including 8 unrelated crashes from 1929 to 1998 on stock markets as diverse as the US, Hong-Kong or the Russian market and on currencies. To our knowledge, no major financial crash preceded by an extended bubble has occurred in the past 2 decades without exhibiting such log-periodic signatures.

University, Yale University and the American Finance Association meetings for helpful comments.

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The supply/demand of a security in the market is an intertemporal, not a static, object and its dynamics is crucial in determining market participants’ trading behavior. In this paper, we show that the dynamics of the supply/demand, rather than its static properties, is of critical importance to the optimal trading strategy of a given order. Using a limit-orderbook market, we develop a simple framework to model the dynamics of supply/demand and its impact on execution cost. We show that the optimal execution strategy involves both discrete and continuous trades, not only continuous trades as previous work suggested. The cost savings from the optimal strategy over the simple continuous strategy can be substantial. We also show that the predictions about the optimal trading behavior can have interesting

Markets have internal dynamics leading to excess volatility and other phenomena that are difficult to explain using rational expectations models. This paper studies these using a nonequilibrium price formation rule, developed in the context of trading with market orders. Because this is so much simpler than a standard inter-temporal equilibrium model, it is possible to study multi-period markets analytically. There price dynamics have second order oscillatory terms. Value investing does not necessarily cause prices to track values. Trend following causes short term trends in prices, but also causes longer-term oscillations. When value investing and trend following are combined, even though there is little linear structure, there can be boom-bust cycles, excess and temporally correlated volatility, and fat tails in price fluctuations. The long term evolution of markets can be studied in terms of flows of money. Profits can be decomposed in terms of aggregate pairwise correlations. Under reinvestment of profits this leads to a capital allocation model that is equivalent to a standard model in population

This paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost. We find upstairs market makers effectively screen out information-motivated orders and execute large liquiditymotivated orders at a lower cost than the downstairs market. Upstairs markets do not cannibalize or free ride off the downstairs market. In one-quarter of the trades, the upstairs market offers price improvement over the limit orders available in the consolidated limit order book. Trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market.

We use a two-year panel of individual accounts in an S&P 500 index mutual fund to examine the trading and investment behavior of more than 91 thousand investors who have chosen a low-cost, passively managed vehicle for savings. This allows us to characterize investors ’ heterogeneity in terms of their investment patterns. In particular, we identify positive feedback traders as well as contrarians whose activities are conditional upon preceding day stock market moves. We test the consistency and profitability of these conditional strategies over time. We find that more frequent traders are typically contrarians, while infrequent traders are more typically momentum investors. The dynamics of these investor classes help us to partially examine the question of the marginal investor over the period of our study. We find that the behavior of momentum investors is typically more correlated to changes in the S&P 500 and we trace its dynamics over time. We build up “behavioral factors ” based on contrarian and momentum flows and show that they perform well against a benchmark of loadings on latent factors extracted from returns. We also use the behavior of momentum and contrarian investors to build a measure of “market polarization”. This captures the dispersion of beliefs among the investors and helps to account for asset pricing better than standard measures of dispersion of beliefs. Acknowledgments: We thank Fidelity for providing us with the data for this study. We thank the International Center for Finance at the

Limit orders incur no price impact, however, their execution time is uncertain. We develop an econometric model of limit-order execution times using survival analysis, and estimate it with actual limit-order data. We estimate versions for time-to-first-fill and time-to-completion, and for limit-sells and limit-buys, and incorporate the effects of explanatory variables such as the limit price, the limit size, the bid/offer spread, and market volatility. We find that execution times are very sensitive to limit price and several other explanatory variables, but not sensitive to limit size. We also show that hypothetical limit-order executions, constructed either theoretically from first-passage times or empirically from transactions data, are very poor proxies for actual limit-order executions.

Emerging markets are characterized by volatile, but substantial returns that can easily exceed 75 % per annum. Balancing these lofty returns are the liquidity concerns of trading in emerging markets. Adopting the model of security returns developed by Lesmond, Ogden, and Trzcinka (1999), liquidity measures are estimated for all securities and time periods (63798 firm-years) for which daily prices are available in 31 emerging markets from 1991 to 2000. Significant cross-sectional differences and time-series variations typify the liquidity measure over the period 1991 to 2000. The liquidity estimates are over 80 % correlated with the proportional bid-ask spread, where available, and regression tests show high association between the proportional bid-ask spread and the liquidity estimate. Additionally, as trade difficulty increases, proxied by price, volume, or market capitalization, the proposed liquidity measure increases consistent with the observed proportional bid-ask spread. Multivariate regression tests show that the proposed liquidity measure remains significant regardless of controlling for all of the trade difficulty variables, as well as turnover. Additionally, the proposed liquidity measure is found to be superior to the trade difficulty variables or turnover at explaining the spread-plus-commission costs in the majority of the 23 emerging markets with Emerging markets are experiencing explosive growth. Not only did the total value of shares traded increase from $15 billion in 1991 to over $200 billion in 2000, but the total market capitalization rose from $306 billion in 1991 to over $1.4 trillion in 2000.