Composition Of Trade Research Articles

Expectations and Learning from Prices

Abstract We study mislearning from equilibrium prices, and contrast this with mislearning from exogenous fundamentals. We micro-found mislearning from prices with a psychologically founded theory of “Partial Equilibrium Thinking” (PET), where traders learn fundamental information from prices, but fail to realize others do so too. PET leads to over-reaction, and upward sloping demand curves, thus contributing to more inelastic markets. The degree of individual-level over-reaction and the extent of inelasticity vary with the composition of traders, and with the informativeness of new information. More generally, unlike mislearning from fundamentals, mislearning from prices (i) generates a two-way feedback between prices and beliefs that can provide an arbitrarily large amount of amplification and (ii) can rationalize both over-reaction and more inelastic markets. The two classes of biases are not mutually exclusive. Instead, they interact in very natural ways, and mislearning from prices can vastly amplify mislearning from fundamentals.

Who trades bitcoin futures and why?

Using regulatory data with identifiers, we analyze the traders active in the Bit- coin futures (BTC) contracts traded on the Chicago Mercantile Exchange (CME). We find two primary trader types, those who hold almost exclusively BTC (con- centrated traders) and those who hold BTC to diversify a broader futures portfolio (diversified traders). The prevalence of these two types changes over time. We also study how BTC markets are connected to other futures markets through common holdings of BTC traders. Finally, we analyze the micro BTC contract and find that the trader composition is different than that of the full-size contract.

The Pricing of Composition Uncertainty

The quant of 2007 and subsequent unfolding of the global financial crisis highlighted the importance of the crowded-trade problem (not being able to know how many others are taking the same position). To investigate the crowded trading, we present a model in which informed and uninformed traders face uncertainty about the composition of traders (composition uncertainty). We characterize the equilibrium in both the information and financial markets. Composition uncertainty distorts traders' information acquisition, demands, and perceived equity premium, resulting in a security price mispricing. The model helps to understand a linkage between liquidity and asset prices, proposes plausible explanations for large price swings, and demonstrates how current regulations to enhance market efficiency may not work in the presence of composition uncertainty.

The effect of short-sale restrictions: another perspective

Purpose The purpose of this paper is to examine the effect of short-sale restrictions (SSR) with particular emphasis on their impact on the liquidity and informed trading in the stock and option markets. Design/methodology/approach Using a panel regression with controls for volatility, VIX and matched stocks, this study examines the effect of the short-sale ban (SSB) on stock and option liquidity, expressed in terms of spread and volume. In addition, the PIN and option information share (OIS) measures have been used to analyze its impact on informed trading in those related markets. Findings The results suggest that the SSB leads to a significant reduction in the liquidity of the affected stocks and their options. However, no significant change in the trader composition can be detected. This result is consistent to the short-prohibition effect predicted by Diamond and Verrecchia (1987). Research limitations/implications Due to the sizeable data required to estimate the PIN and OIS measures, only a select sample of optionable stocks has been examined. Originality/value This study offers both academics and policy makers some useful insights into the effect of SSR on trading activities in both stock and option markets. From a policy perspective, it clearly demonstrates that regulatory changes targeting a specific market also affect other related markets via the arbitrage link between them.

The Effects of Margin Changes on the Composition of Traders and Market Liquidity: Evidence from the Taiwan Futures Exchange

We examine the effects of margin changes on futures trading activity, the composition of traders, and market liquidity using an account‐level data set from the Taiwan Futures Exchange. We find that margin increases reduce trading activity for all trader types, which indicates that higher margins increase trading costs. Institutional trading is more sensitive to changes in margin requirements than individual traders. This, in turn, leads to increases in market price volatility and decreases in market liquidity. These results imply that margin requirements are not an effective policy tool for limiting the trading activity of noise speculators to reduce market volatility. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 35:894–915, 2015

The Effects of Margin Changes on the Composition of Traders and Market Liquidity: Evidence from the Taiwan Futures Exchange

We examine the effects of margin changes on futures trading activity, the composition of traders and market liquidity, using an account level data set from the Taiwan Futures Exchange. We find that margin increases reduce trading activity for all trader types, which is consistent with the hypothesis that higher margins increase the costs of trading. Institutional traders are more sensitive to changes in margin requirements than individual traders, because their trading activity decreases significantly more than that of individual traders. This in turn leads to increases in market price volatility and decreases in market liquidity. These results imply that margin requirement is not an effective policy tool in limiting the trading activity of noise speculators to reduce market volatility.

Differences in Trading and Pricing Between Stock and Index Options

We find that the demand for stock options that increases exposure to the underlying is positively related to the individual investor sentiments and past market returns, whereas the demand for index options is invariant to these factors. These differences in trading patterns are also reflected in the differences in the composition of traders with different types of options—options on stocks are actively traded by individual investors, whereas trades in index options are more often motivated by the hedging demand of sophisticated investors. Consistent with a demand-based view of option pricing, the individual investor sentiments and past market returns are related to time-series variations in the slope of the implied volatility smile of stock options, but they have little impact on the prices of index options. The pricing impact is more pronounced in options with a higher concentration of unsophisticated investors and those with higher delta hedging costs. Our results provide evidence that factors not related to fundamentals also impact security prices. This paper was accepted by Brad Barber, finance.

Trader Composition and the Cross-Section of Stock Returns

This paper analyzes the impact of trader composition - i.e., the fraction of total trading volume of a stock accounted for by institutional trading|on the cross-section of stock returns. During 1980-2005, trader composition is significantly different from institutional ownership, a quantity that has received much more attention in the current literature. We find that major stock market anomalies, such as return momentum, post earnings-announcement drift, value premium, and investment effect are significantly stronger in stocks with lower institutional trading volume. Furthermore, stocks with lower institutional volume underperform stocks with higher institutional volume by 0.25% to 0.53% per month depending on different return adjustments. These findings suggest a positive relationship between fraction of institutional trading volume and stock price efficiency.

Trader Composition and the Cross-Section of Stock Returns

Trader Composition and the Cross-Section of Stock Returns

Trader Composition and the Cross-Section of Stock Returns

Trader Composition and the Cross-Section of Stock Returns

The Effects of Investor Sentiment on Speculative Trading and Prices of Stock and Index Options

We find that the demand for stock option positions that increase exposure to the underlying is positively related to measures of investor sentiment and past market returns, while the demand for index options is invariant to these factors. These differences in trading patterns are reflected in differences in the composition of traders in the different types of options -- Options on stocks are actively traded by individual investors, while trades in index options are more often motivated by hedging demands of sophisticated investors. Consistent with a demand based view of option pricing, we find that sentiment is related to time-series variation in the slope of the implied volatility smile of stock options, but has little impact on the prices of index options. The pricing impact is more pronounced in options with a higher concentration of unsophisticated investors and in options with higher hedging costs. Our results provide new evidence factors not related to fundamentals affect price of securities actively traded by noise traders.

Optimal Financial Integration and Security Design

We study two-period pure-exchange Capital Asset Pricing Model (CAPM) economies with a given degree of incompleteness of financial markets and given degrees of restricted participation of agents in the markets. We characterize the optimal financial asset structure and the optimal composition of traders for such economies. We identify a minimal property of the optimal financial structures which is required to 'decentralize' such structures by means of financial innovations that (i) introduce new financial assets, and/or (ii) integrate segmented markets. We give a precise characterization of the conditions under which such a property is satisfied. We find that when the nature of restricted participation in markets for trading in different assets is different, the optimal financial structure is, in general, not 'decentralizable,' and the order in which innovating intermediaries introduce the financial assets affects the optimality of financial structures.

The Effects of Changing Margin Levels on Futures Market Activity, the Composition of Traders in the Market, and Price Performance

In December 1984 the Board of Governors of the Federal Reserve System released A Review and Evaluation of Federal Margin Regulation (Federal Reserve Bank 1984). This study reexamined the purpose and the necessity of federal margin regulation in light of the changing structure of U.S. and foreign financial markets. Four major issues related to the effect and usefulness of security margin requirements were discussed, including (a) the diversion of credit from productive investment to purely speculative endeavors; (b) the protection of unsophisticated investors, who might overextend their private financial resources; (c) the protection of brokers from customer default; and (d) the use of credit limitations to forestall undue destabilizing price fluctuations. Two issues related to the coordination of margin requirements on securities, options, and fu-