Net Trades Research Articles

Internalizing match-dependent externalities

External effects can be triggered through trade and depend on the locations of buyers and sellers who are matched. Inspired by electricity markets, we experimentally investigate markets in which net trades between two locations induce social costs. Based on a modified double auction setting, we compare the performance of market platforms that are location-blind with those where information on the location of (potential) trading partners or the level of the externality is given. We demonstrate that locational information is sufficient to reduce the externality. Imposing the full external costs on individual trades leads to maximal price differentiation between locations and further reduces net trades, while welfare improvements are limited. Reasons for not achieving the typically high efficiency of double auctions are discussed.

Executive Compensation Schemes: Accelerants of Agency and Corporate Governance Problems in South Africa

Executive remuneration has been less analysed and there is need for scrutiny on executive compensation structures and their implications on corporate governance. The study aimed to ascertain the role of executive compensation in accelerating agency and governance problems for FTSE/JSE Top-40 companies from 2008 - 2016. A Generalised Method of Moments was employed, and the results revealed that executive compensation structures can be accelerants of agency and corporate governance problems as the performance was found to negatively affect directors' remuneration. Also, governance had a negative impact on remuneration. Share option trading results confirm agency conflict as net trades and the number of directors that traded on their share options were found to deteriorate with improvement in remuneration. Therefore, it is recommended that the remuneration of executives must be aligned with performance and corporate governance. Moreover, executive directors must exercise their share options after the vesting period and in years they meet predetermined performance targets. Companies should adopt the proposed executive remuneration model in their policies to ensure that executive remuneration considers the governance of the companies they lead. The study's proposed model can be modified in future studies to incorporate other performance matrices such as the six capitals. Keywords: Remuneration Model, Executive Compensation, Governance, Share Options

The Cost of Clearing Fragmentation

Fragmenting clearing across multiple central counter-parties (CCPs) is costly. This is because dealers providing liquidity globally, cannot net trades cleared in different CCPs and this increases their collateral costs. These costs are then passed on to their clients through price distortions which take the form of a price differential (basis) when the same products are cleared in different CCPs. Using proprietary data, we document an economically significant CCP basis for dollar swap contracts cleared both at the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) and provide empirical evidence consistent with a collateral cost explanation of this basis.

Personal Characteristics of Finance Ministers as a key Determinate of Changes in Interest Rates: The Case of 35 OECDS Nations

This research made use of a one-of-a-kind data collection including the personal characteristics of finance ministers from 35 nations that are members of the OECD (2007-2020). In this paper, an effort is made to analyze the influence of scientific publications by finance ministers on the interest rates of OECD member nations' governments. Data is collected from World Bank. A multiple regression model is employed to examine the effects of additional factors. The finding reveals that the correlation is negative and the impact is considerable, the degree of the effect is sensitive to the magnitude of the correlation. In contrast, the educational background of a finance minister, as well as other characteristics such as exports,imports, gross domestic product (GDP), and net trades, has a major influence on the short-term interest rate and long-term interest rate of OECD member nations.

Stable Contractual Allocations, Equilibria and Core in Incomplete Markets

The paper presents and studies a new concept of coalition domination for incomplete markets. It was elaborated applying a contractual approach and based on the notion of fuzzy contractual allocation, see Marakulin (2011, 2013). Core allocations are implemented by the net trades (webs of contracts) having the following kind of stability. There is no coalition which is able to dominate allocation doing so: (i) in the present it breaks off all contracts in all states of nature and conclude a family of ineffective contracts in the future and a (profitable) new contract in the present or (ii) in future, in each given state of the world, contracts are broken partially and asymmetrically, after that a new contract is concluded. Requirement (i) can be treated as the impossibility to compensate for the signing of ineffective contracts in the future by concluding a new contract in the present. Also, GEI-equilibrium is described as (ii) applied to all states of the world. This core converts into a classical one when the market turns complete. Under perfect competition conditions, core allocations are GEI-equilibria. These properties prove the validity of the suggested core.

Equilibria Under Knightian Price Uncertainty

We study economies with Knightian uncertainty about state prices. We introduce an equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to inefficient allocations; they coincide with Arrow-Debreu equilibria if and only if the values of net trades are ambiguity-free in mean. In economies without aggregate uncertainty, inefficiencies are generic. Equilibrium allocations under price uncertainty are efficient in a constrained sense that we call uncertainty-neutral efficient. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.

Non-implementability of Arrow–Debreu equilibria by continuous trading under volatility uncertainty

In diffusion models, a few suitably chosen financial securities allow to complete the market. As a consequence, the efficient allocations of static Arrow–Debreu equilibria can be attained in Radner equilibria by dynamic trading. We show that this celebrated result generically fails if there is Knightian uncertainty about volatility. A Radner equilibrium with the same efficient allocation as in an Arrow–Debreu equilibrium exists if and only if the discounted net trades of the equilibrium allocation display no ambiguity in the mean. This property is violated generically in endowments, and thus Arrow–Debreu equilibrium allocations are generically unattainable by dynamically trading a few long-lived assets.

An Alternative Market Framework for Water Transfers When Third Party Externalities Dominate

Economic studies have argued that transaction costs and third-party impact of water transfers can reduce the potential of water markets in allocating water efficiently across users. The main objective of this study is to design and empirically simulate a market structure, which can overcome the transaction costs and some of the third-party externalities in surface water trading. An important characteristic of this market is trading conducted within a centralized framework by a market manager. Once the bidding rounds are closed, the market manager formulates the market model as a linear programming problem to find the market equilibrium for the bids submitted. The market manager then determines net trades on the basis of each participant’s initial permit allocation. Empirical simulations of the above market design demonstrate that the marginal cost price paid by each participant internalizes the third party impacts of water transfers. Prices are recalculated based upon binding flow constraints in each round of trade and hence additional transaction costs are avoided.

How some bankers made a million by trading just two securities?

Abstract We study a pair trading strategy that utilizes short-term return reversals in the stock market. Using U.S. data, we show that returns to our pair trading strategy exceed reasonable estimates for transaction costs. The strategy also generates positive alpha when controlling for the standard risk factors. Second, using transaction level data from Finland, focusing on a popular pair, we provide evidence that these kinds of pair trading returns are compensation from providing liquidity. On the days when the expected returns to our pair trading strategy are the highest, the trading volume is abnormally high and, judging from active brokers’ net trades, nearly 45% of all brokers (or their customers) engage in pair trading in accordance with our trading strategy. These brokers are mainly counterparties to few brokers that trade large quantities of stocks inconsistent with our strategy.

How Some Bankers Made a Million by Trading Just Two Securities?

In this paper, we study a pair trading strategy that utilizes short-term return reversals in the stock market. Our analysis is based on a theoretical model of the short-term return reversal phenomenon presented in Suominen and Rinne (2009). That paper was applied empirically to estimate the returns to a contrarian, liquidity providing trading strategy in Rinne and Suominen (2010). In this paper, we study the returns to that same trading strategy in the context of a single pair trade in the Finnish stock market. We show that for this particular pair trade, the returns to the liquidity providing trading strategy were extremely high: weekly returns were more than 2% (of the long position), corresponding to annualized returns of more than 200% before transaction costs. These returns are highly statistically significant and exceed well any reasonable estimates for transaction costs. In recent years, possibly due to larger amount of capital devoted to statistical arbitrage and lower transaction costs for traders, the pre-transaction cost returns from this trading strategy have decreased. Our evidence is consistent with the idea that these returns were compensation from providing liquidity to the market. On the days when the expected returns to our trading strategy were the highest, the volume was abnormally high and, judging from active brokers net trades, nearly 45% of all brokers (or their customers) engaged in pair trading in accordance with our trading strategy, being counterparts largely to few brokers that traded large quantities of stocks inconsistent with our strategy. We show that three brokerage houses (or their customers) made more than a million (pre transaction costs) by engaging in pair trading involving just these two securities.

Contracts and domination in incomplete markets: what is a true core?

The goal of the paper is to propose and study a concept of domination by coalitions for incomplete markets. Previously elaborated in the context of contractual approach, now it is presented in more or less standard terms and style. This concept is described as a set of allocations implemented by the net trades (webs of contracts) that are characterized by a special kind of stability in future markets: (i) for every state of the world inducted allocation has to be Pareto optimal and individually rational and (ii) there is no coalition which is able to dominate the allocation via financially feasible trades in future spot markets using real assets and relative to prices specified by (i) (partial Pareto prices). This core converts into a classical one when the market turns complete. Under perfect competition conditions core allocations are GEI-equilibria. These properties prove the validity of suggested core.

Vertical specialization in the Korean manufacturing sector

Purpose– The purpose of this paper is to answer for questions regarding vertical specialization in the Korea’s key exporting industries, such as the changing pattern toward VS or VS1 and the changing trend in the location of slicing up the value chain in these industries.Design/methodology/approach– The framework of Koopmanet al.(2014) is adopted to calculate the industry-level vertical specialization indices, VS and VS1.Findings– VS1 is a dominant type of vertical specialization in the key exporting industries of Korea. The increasing net vertical trades (VS1−VS) verifies the upward trends in the locations of slicing up the value chain in the industries empirically.Research limitations/implications– The net vertical trade (VS1−VS) of each industry is an important indicator of the location of slicing up the value chain in the environment of the international production network.Originality/value– The industry-level calculations of VS and VS1 are necessary in order to remedy the aggregation bias from the country-level calculation of VS and VS1 functioning in the opposite direction.

Predicted Institutional Trades and the Cross-Section of Returns

I investigate whether it is possible to predict the aggregate net trades into a stock by financial institutions and to profitably trade on these predictions. I find that aggregate net trades can be predicted across forecast horizons ranging from 1 quarter to 20 quarters. Predicted institutional trades, defined as the forecasted cumulative net trades of all financial institutions into a stock over the following Q quarters scaled by a stock’s current number of shares outstanding, has a negative relation with returns. The low-high predicted institutional trades portfolio earns an annualized Fama and French alphas of 10.55%.

Institutional Investor Trading in a Short Investment Horizon: Evidence from the Korean Stock Market

We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.

Efficient, fair, and strategy-proof (re)allocation under network constraints

A resource available in different types is to be distributed or redistributed among agents differing in their ability to consume these types. Preferences over consumption levels are not observable but known to be single-peaked. We identify the only strategy-proof and efficient allocation rule satisfying a formulation of “fair net trades” (Schmeidler and Vind in Econometrica 40(4):637–642, 1972). This rule coincides with the “generalized uniform rule” (Thomson in Axiomatic analysis of generalized economies with single-peaked preferences, 1995a) when the resource is available in a single type and with the “egalitarian rule” (Bochet et al. in J Econ Theory 148:535–562, 2013) when there are no individual endowments. Moreover, it coincides with the “uniform rule” (Sprumont in Econometrica 59(2):509–519, 1991) when the resource is available in a single type and there are no individual endowments. This rule belongs to a new class of group strategy-proof rules. Our analysis provides a unified treatment of the applications in Bochet et al. (Theor Econ 7:395–423, 2012, J Econ Theory 148:535–562, 2013).

Non-Implementability of Arrow-Debreu Equilibria by Continuous Trading Under Knightian Uncertainty

Under risk, Arrow-Debreu equilibria can be implemented as Radner equilibria by continuous trading of few long-lived securities. We show that this result generically fails if there is Knightian uncertainty in the volatility. Implementation is only possible if all discounted net trades of the equilibrium allocation are mean ambiguity-free.

Expected Utility and Equilibrium with Subjective Choice Sets and Strategic Reporting

This paper studies an economy where agents trade using a shared language, so that they do not need to meet in person with goods physically present. Agents provide vague descriptions of proposed net trades, which we interpret as arising either from inherent limitations in what the agents can describe or from strategic presentations of information. We construct a family of orders over terms in the language, arising from an individual's preferences over consumption as subjectively perceived, illustrate the induced order's properties, and show the constructive existence of competitive equilibrium. Finally, we illustrate the relationship between the existence of a competitive equilibrium obtained in the language and the one that would result from an interaction involving perceived consumption sets.

Rules (of Bidding) to Generate Equal Stated Profits: An Axiomatic Approach

Although one may hope to achieve equality of stated profits without enforcing it, one may not trust in such voluntary equality seeking and rather try to impose rules (of bidding) guaranteeing it. Our axiomatic approach is based on envy-free net trades according to bids, which, together with the equality requirement, characterize the first-price auction and fair-division game.

On the uniqueness of local equilibria

The purpose of this paper is to define a new notion of local equilibrium in an exchange economy, where the consumers face lower bounds on net trades. Then, we show that the local equilibrium is unique if the lower bounds are closed enough to 0. By the way, we also provide a convergence result of local equilibrium price toward Walras equilibrium price of a suitable tangent linear economy.

Informational differences among institutional investors in an increasingly institutionalized market

Studying the informativeness of institutional trades, this paper examines informational differences among institutional investors in the Taiwan stock market. Evidence shows that the net trades of (domestic) mutual funds impound information superior to the net trades of foreign investors and securities dealers, regardless of the selected formation and holding periods. The information advantage of mutual funds does not result from their trading persistence but from their stock-picking skill. The advantage is positively related to information asymmetry proxied by the smallness of firms, even after controlling for the risks associated with institutional equity preferences.