Low Trading Research Articles

Implications of a cap‐and‐trade system for emission reductions under an asymmetric duopoly

AbstractClimate change is a global problem causing wide concern and requiring workable solutions. The cap‐and‐trade system is recommended as a workable mechanism to reduce the emissions of enterprises and a popular policy affecting production and the environment. This article considers market power and studies the effects of a cap‐and‐trade system on the performance of companies and environmental protection under an asymmetric duopoly. A two‐step model was established to analyze the outputs, prices, and emission under the cap‐and‐trade system. The result indicates that the cap‐and‐trade system has significant implications for cleaner production. More precisely, the optimal emission cap is feasible with the function of social welfare. Both a low emission cap and high emission trading price are beneficial for promoting the development of sustainability. Moreover, the market value of the cap‐and‐trade system offers a huge incentive to companies emitting carbon dioxide. In particular, inefficient firms have a greater stimulus than efficient ones to reduce emissions to economize the cost of production. In summary, the cap‐and‐trade system makes a great contribution to the development of smart business.

Limit order books: a systematic review of literature

PurposeThis study aims to provide a systematic literature review of the research study in the area of limit order book (LOB) mechanism of trading and its implications for market efficiency. The study attempts to document the recent theoretical developments and empirical findings from the literature exhaustively and identifies the research gaps for future research.Design/methodology/approachThe study uses seven reputable databases to select 2,514 research studies spanning over 1981-2018 (finally compressed to a pool of 103 articles, based on relevance and impact). The study uses bibliometric network visualization and text analytics to categorize and examine the literature. The chosen articles are compiled and analyzed to provide a comprehensive account of the current research on LOBs.FindingsThe recent LOB literature is summarized on various criteria as follows: sub-areas, the types of economies and markets, methodologies and the LOB measures. The review identifies a dearth of studies on the LOBs in emerging markets. It suggests the potential research areas as intraday studies in emerging LOB markets; application of market indicators based on deeper levels of LOB, beyond the best prices; market fragmentation, order routing decision and its impact on order execution quality; optimal display of LOB levels; liquidity dynamics in quote-driven markets vis-à-vis LOB markets; effect of high-frequency trading on market microstructure; application of advanced techniques (e.g. machine learning models, zero-intelligent models); relationship between the trading speed, order aggressiveness, shape and resilience of the order book and informed trading; and information content of the auxiliary order submission strategies, including cancellation, amendments and hidden orders.Originality/valueFor the past 15 years, to the best of the knowledge, a comprehensive review of the literature on LOBs has not been published. The financial markets have transformed significantly over this period, driven by the adoption of LOBs, low latency trading and technological advancements in information dissemination. This article provides an extensive collection and classification of the literature on LOBs. This would be useful for the practitioners, future researchers and academics in the area of financial markets.

Does policy uncertainty of the blockchain dampen ICO markets?

AbstractPolicy uncertainty created by regulatory authorities regarding the blockchain matters for the initial coin offering (ICO) market. Using an ICO dataset from four major cryptocurrency exchanges, we find that higher policy uncertainty regarding the blockchain leads to a lower return and a lower trading volume of an ICO on its first trading day. Although ICOs are decentralised by design and less vulnerable to direct regulatory intervention, we conclude that blockchain policy uncertainty constitutes an important component of the information environment of ICO ventures.

Testing Market Timing Using Daily Mutual Fund Returns

When using daily mutual fund returns to study the market timing, heavy tails and heteroscedasticity significantly challenge the existing methods. We to accommodate them, we propose a new measure and an efficient test for market timing ability and find that the traditional test misclassifies about 50% of funds. Excluding funds withvzero timing ability, we find that that higher timing ability is associated with lower stock picking skill, this conclusion is robust to different benchmark models. Examining theholding characteristics of the funds with different levels of timing ability, we find that funds with a positive timing ability hold stocks with lower trading frictions.

Ex-post effects of circuit breakers in crisis and calm markets

PurposeDespite regulatory claims of straitening volatility and preventing crashes, evidences on circuit breakers' ability to achieve so are nonconclusive. While previous scholars studies general performances of circuit breakers, the authors examine whether Malaysian price limits aggravate volatility, impede price discovery, and interfere with trading activities in both tranquil and stressful periods.Design/methodology/approachThe study uses a combination of parametric and nonparametric techniques consistent with Kim and Rhee (1997) to examine the major ex-post hypotheses in circuit breaker research.FindingsFor calm markets, the authors find significant success of upper limits in tempering volatility with low trading interference. Lower limits show mixed results. Conversely, in crisis markets limits fare poorly in nearly all aspects, particularly for lower limits.Practical implicationsRamifications of the paper's findings are discussed through highlighting the asymmetric nature of price limits' ex-post effects. The paper also contributes to regulatory debate surrounding the quest for an optimal price limit.Originality/valueThe paper is the first of its kind in documenting long-horizon evidence of ex-post effects of a wide-band price limit. Moreover, the paper is unique in its approach in bifurcating circuit breaker performance along the line of market stability periods.

Pricing efficiency of Saudi exchange traded funds (ETFs)

PurposeThis paper aims to investigate the pricing efficiency of Saudi Sharia-compliant (i.e. Islamic) exchange-traded funds (ETFs).Design/methodology/approachThe paper adheres to a positivist research philosophy with a deductive research approach where data is collected, analyzed and interpreted to examine a hypothesis. Ordinary least squares (OLS) regressions are applied to investigate pricing efficiency and persistence.FindingsThe results show that Saudi ETFs do not currently offer proper diversification for investors, possibly due to their low trading volumes and the delays of market prices in reflecting net asset value (NAV). On average, ETFs trade at a premium to their NAVs. Moreover, the authors find that the deviations of ETF prices from their NAVs (i.e. premiums or discounts) do not disappear in one day. The results reveal a significant positive relationship between the trading volume of Saudi ETFs and volatility, a significant positive correlation between ETF returns and contemporaneous deviations and a significant negative relationship between returns and lagged deviations. These findings can be interpreted as evidence against the market efficiency of Saudi ETFs.Practical implicationsIndividual and institutional investors can use Saudi ETFs, especially as their efficiency improves with increased trading volume (liquidity). Saudi regulators must increase their efforts to educate market participants and expand the availability of information to enhance transparency and awareness of the benefits of investing in ETFs, which will positively affect liquidity and pricing efficiency in the future.Originality/valueThis paper is the first to perform empirical tests on Saudi ETFs. Saudi Arabia deserves further attention because it is the most significant stock market in the Gulf Cooperation Council and only recently allowed foreigners to participate.

Stock Markets and Female Participation in the Labor Force

This paper examines the relation between female participation in the labor force and stock market trading volume. We focus on the first teaching day of the year at kindergartens and primary schools, treating it as an event with characteristics that resemble an exogenous event, and verify this using a web-based survey. We find that the first day of school has lower trading volume than the average daily trading volume during the rest of the year. Moreover, we document that female workforce participation is negatively associated with the trading volume on this day, and that in societies which have legislated gender nondiscrimination laws that govern hiring, this negative effect is even more pronounced. Our main findings document a significant societal phenomenon with a profound impact on stock markets, and specifically on the quality of information environment, and therefore merit further attention.

ДЕРИВАТИВИ ЯК ФІНАНСОВІ ІННОВАЦІЇ ФІКТИВНОГО КАПІТАЛУ

The article considers the economic nature of derivatives as financial innovations of fictitious capital. Their essence and various classification forms are characterized. It is determined that derivatives are used mainly for risk hedging, as well as for the implementation of investment strategy. Derivatives as innovative financial products are formed as a result of specific relations of economic entities in the process of their innovative activity in the financial market. These relationships allow to meet the needs associated with the search for sources of funding, involve virtually unlimited opportunities for variation in the amount of risk and its redistribution, provide liquidity and increase the final financial results. By setting future prices, participants in futures contracts can plan their activities in the future. Prices in this market are a kind of indicator of the future state of the economy. The development of the derivatives market in Ukraine is slow, and is accompanied by low trading volumes and a rather limited range of derivative securities used as a hedging instrument, so it is important to study global trends in its operation at the present stage. In the context of financial globalization, derivatives are an integral part of global capital markets, and derivatives help a wide range of end users to manage risk and improve profits. Participants in the global derivatives market say that their liquidity remains unchanged or improves in 2019, with more than 80% expecting the same in 2020. Such positive sentiment from end consumers, investors, clearing companies, brokers, traders and exchanges, participating in global derivatives markets is an indicator of high confidence. The analysis of the functioning of the world derivatives market and the development of the derivatives market in Ukraine is carried out. Positive and negative tendencies of development of this market are revealed. The main problematic aspects that hinder the effective operation of the domestic derivatives market are outlined. Based on the analysis of the state and dynamics of the derivatives market in Ukraine, the main directions of its development are proposed.

Empirical Analysis of the Illiquidity Premia of German Real Estate Securities

In this study, we analyze illiquidity premia and their effect on the expected returns of German real estate securities. To this end, we use a unique data set that includes real estate stocks, real estate investment trusts (REITs), and open- and closed-end real estate funds for 2003 to 2017. We follow Amihud‘s (2002) structural approach; specifically, we estimate Amihud‘s illiquidity factors, investigate the relationships between expected returns and illiquidity, and analyze the effects of expected and unexpected market illiquidity on future returns. We show that illiquidity plays an important role in expected REITs; however, it has less-clear effects on open- and closed-end funds. We found that the adjusted ILLIQ includes appropriate correction factors for securities with low trading activity and is a useful improvement. We also find evidence of structural breaks in the relationship between returns and illiquidity.

The 2020 European Short-Selling Ban and the Effects on Market Quality

Responding to the dramatic price declines during the COVID-19 pandemic, six European countries introduced short-selling bans in March 2020. We analyze how these restrictions affected the market quality by comparing countries with and without bans. We observe for ban countries relatively lower market liquidity, lower trading volume, and wider bid-ask spreads. Moreover, regulators’ aim to prevent price declines and reduce volatility failed, as ban and no-ban countries reveal no differences and prices increased. Our results clearly detail the negative market-quality effects resulting from restrictions, especially for smaller markets and firms. Consequently, this regulatory interference did not protect but harmed investors.

Dynamics of Interest Rate Futures: A Comprehensive Study from The Sydney Futures Exchange

This paper examines the dynamics of quoted bid-ask spreads, price volatility and percentage trading volume for the most liquid interest rate futures trading on the Sydney Futures Exchange. Using data for both the overnight and intraday markets of the Sydney Futures Exchange, patterns contrast the existing theory and prior research. During the Intra-night trading session, volume and volatility patterns show low trading activities between 5:30 and 9:30; while spreads show high asymmetric information during this interval. During the Intra-day trading session, both volume and volatility exhibits a significant increase at the opening and around 2.30pm, followed a significant decrease towards the end of the day session; Spreads are low at the opening and tendentially increase throughout the day up until the close of the day. We find that percentage Volume traded is higher during the day session; although spread significantly increases towards the end of the day session, it is tighter than the overnight spread. A number of tests are carried out documenting that these patterns are consistent with the effects of contagion from overseas markets, US versus Australia daylight savings, and major macro-economics information releases.

Dynamic Unravelling and Low Volume Crashes

Rapid declines in the prices of financial securities on low trading volume -- low volume crashes -- are ubiquitous. This paper proposes a dynamic model with informational asymmetries, costly short-selling, and endogenous liquidity trader participation to explain this phenomenon. Owing to short-selling constraints, no-trade events are bad news. No-trade therefore lowers prices, worsens adverse selection, increases bid-ask spreads and causes liquidity traders to leave the market, making no-trade more likely. This generates endogenous auto-correlation in no-trade events -- dynamic unravelling -- and causes low volume crashes. Short-selling prohibitions harm price discovery and make crashes more likely. Liquidity interventions aid price discovery and avert crashes.

Daily Trading Patterns in the Bitcoin/Euro Market

Using bitcoin/euro transaction data from three exchanges of varying size and segmenting the Bitcoin transactions into periods based on market conditions, it can be seen that trading activity patterns change with market conditions and the Bitcoin exchange used. There is only limited evidence in support of a reduction in trading at the weekends which also depends on the exchange and market conditions. There is evidence to support Kurihara and Fukushima (2017) and Baur et al (2019) who find lower trading volume at the weekends, which is a direct reflection of fewer large transactions, as we find that for all three exchanges and in all market conditions the number of large transactions declines at the weekend.

Tax‐Efficient Asset Management: Evidence from Equity Mutual Funds

ABSTRACTWe investigate the relation between tax burdens and mutual fund performance from both a theoretical and an empirical perspective. The theoretical model introduces heterogeneous tax clienteles in an environment with decreasing returns to scale and shows that the equilibrium performance of mutual funds depends on the size of the tax clienteles. Our empirical results show that the performance of U.S. equity mutual funds is related to their tax burdens. We find that tax‐efficient funds exhibit not only superior after‐tax performance, but also superior before‐tax performance due to lower trading costs, favorable style exposures, and better selectivity.

The intraday timing of rating changes

Using time stamps of Standard & Poor's rating changes, we examine the timing of rating changes in an intraday setting. Our evidence shows that although most rating changes occur during trading hours, the proportion of downgrades announced after regular trading hours is higher than that of upgrades. In addition, unexpected after-hour downgrades are associated with more negative stock returns and lower trading volume in comparison to those announced during trading hours. We also find that Standard & Poor's is more likely to announce downgrades after hours when downgrades are released on busy days with many concurrent rating announcements, when they concern financial firms, and when they are unexpected. In addition, Egan-Jones Ratings (EJR), an investor-paid credit rating agency, demonstrates a similar tendency in announcing downgrades after trading hours. This is the first study to document systematic differences in the timing of credit rating changes announced before and after the market closes. Our findings suggest that Standard & Poor's announces downgrades after trading hours to better disseminate information, and thus have important policy implications.

Sovereign Bonds in Emerging Asia: Do Investors Demand Liquidity Premium?

This study explores how liquidity premium is priced in emerging bond markets and has implications for the investors, because these markets exhibit lower liquidity levels and behave differently from the developed West. Liquidity risk epitomizes higher trading costs, lower trading speed, and higher price impact of large trades. The study investigates pricing implications of these liquidity dimensions across a wide term structure of sovereign bonds. We also identify the most prominent liquidity component that causes yield spread changes and drives investment decisions. Our study comprises nine bond classes, ranging from 3-month to 10-year bonds, across six emerging Asian markets. We observe that the liquidity risk increases along with the term to maturity of the bond. Our empirical results reveal that the price impact dimension is vital for short-term investments. The trading cost and trading frequency dimensions are priced in the medium-term and long-term bonds. It was also observed that investors consider the trading cost as a more important element than the trading frequency and price impact dimensions. TOPICS:Emerging markets, project finance, statistical methods, credit risk management Key Findings • Liquidity risk increases with the term to maturity of the bond. • Higher price impact generated by large trades is found to determine investment decisions in short-term bonds while trading cost and frequency are found important for medium- and long-term investments. • In general, investors consider trading cost as a more important element than other dimensions of liquidity while investing in emerging markets.

Disposition effect at the market level: evidence from Indian stock market

PurposeThe purpose of this paper is to test the disposition effect at market level and propose an appropriate reference point for testing disposition at market level.Design/methodology/approachThis is an empirical study conducted on 500 index stocks of NSE500 (National Stock Exchange). Winning and losing days for each stock are calculated using 52-week high and low prices as reference points. To test disposition effect, abnormal trading volumes of stocks are regressed on their percentage of winning (losing) days. Further using ANOVA, the difference between mean of percentage of winning (losing) days of high abnormal trading volume deciles and low abnormal trading volume deciles is tested.FindingsResults show that a stock’s abnormal trading volume is positively influenced by the percentage of winning days whereas percentage of losing days show no such effect. Findings are consistent even after controlling for volatility and liquidity. ANOVA results show the presence of high percentage of winning days in higher deciles of abnormal trading volumes and no such pattern in case of losing days confirms the presence of disposition effect. Further an ex post analysis indicates that disposition prone investors accumulate losses.Originality/valueThis is the first study, which proposes the use of 52-week high and low prices as reference points to test the market-level disposition effect. Findings of this study enhance the limited literature available on disposition effect in emerging markets by providing evidence from Indian stock markets.

Costly index investing in foreign markets

We study trading behavior and performance of foreign investors by level of active management. Using a comprehensive Colombian dataset with complete transaction records, we find that aggregate underperformance of foreign investors is attributable to passively-managed foreign funds. These funds pay higher prices to increase the speed of their trades in order to accommodate daily flows proportionally to their benchmark index. Higher transaction costs occur on days when they trade multiple stocks in the same direction and make large trades near market closing. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity.

Market Reaction to Exchange Listings of Cryptocurrencies

Cryptocurrency markets operate at a global scale and are lightly regulated compared to traditional securities markets. Cryptocurrencies like Bitcoin trade across multiple secondary markets that differ significantly in term of liquidity, governance and trust. This study explores 327 exchange listings of 180 cryptocurrencies on 22 different cryptocurrency exchanges and examines the resulting price effects using event study methodology. The results show a significant average abnormal return of 5.7% on the day of the listing event and 9.2% in the window of three days before until three days after the listing. The effects clearly differ for individual cryptocurrency exchanges, with listings on only a few exchanges yielding significant positive short-term abnormal returns of up to 25.5% on the day of the listing. Other exchanges show no significant effects at all or even significant negative returns, which suggests informed trading or market manipulation. Additional tests show that higher market capitalization in combination with lower trading volume leads to higher abnormal returns at exchange listings of blockchain-based assets.

Closed-Loop Hierarchical Operation for Optimal Unit Commitment and Dispatch in Microgrids: A Hybrid System Approach

To contribute to a smart grid, the unit commitment and dispatch (UCD) is a very important problem to be revisited in the future microgrid environment. In this paper, the UCD problem is studied by taking account of both traditional thermal units and distributed generation units (DGs) while considering demand response (DR) and carbon emissions trading (CET). Then, the UCD problem is reformulated as the optimal switching problem of a hybrid system. The reformulation allows convenient handling of time-dependent start-up cost for dynamic programming (DP). Afterwards, a closed-loop hierarchical operation (CLHO) algorithm is developed which is capable of producing the optimal schedule in the closed-loop behavior. Theoretical analysis is also presented to show the equivalence of the reformulation and the effectiveness of the CLHO algorithm. Finally, the closed-loop behavior and the effectiveness of the algorithm are further verified by simulation studies. It is also shown that low emission quotas and high emission trading price help reduce the total carbon emissions.