Trade Transaction Costs Research Articles

Firm Trading Behaviour and Transaction Costs in the European Union’s Emission Trading System: An Empirical Assessment

To the best of our knowledge, this study is one of the first to empirically analyze the trading behaviour of all ETS firms during the first phase of the EU’s Emissions Trading System. We use a unique dataset which allows investigating the importance of permit trading transaction costs, such as information costs and search costs. This paper shows that transaction costs can play an important role in the initial years of the programme. These costs are significant in explaining why a number of ETS firms did not sell their unused allowances on the market. This study also supports the concerns that transaction costs might be excessive for smaller participants.

The self-imposed embargo: customs-related transaction costs of North Cyprus

Customs-related transaction costs are a major barrier to the expansion of international trade. These costs are a financial burden to importers and ultimately to consumers. This study measures the transaction costs that are created by the obsolete customs and port handling procedures in North Cyprus. Such an analysis is important because since 1974 North Cyprus has suffered under a direct trade embargo. All its imports and exports must come or go via the ports in Turkey. This study finds that excessive trade transaction costs inflicted by the inefficient port handling and customs services of North Cyprus is between 1.42 to 2.96 times as costly as the extra transportation costs caused by the international embargo on its direct trade with the rest of the world.

How Trading in the Options Market Interacted with Trading in Underlying Stocks Around the Effective Date of the SEC Penny-Pilot Program

In an attempt to increase the competitiveness and the efficiency of electronic trading on the six US option exchanges, the Securities and Exchange Commission (SEC) recently issued a new rule (the so called Penny-Pilot program) that required a significant reduction in the tick size of more than 370 stocks. One obvious consequence of this new rule was a reduction in the transaction or execution costs in options trading. This new regulation provides a natural experiment to investigate the extent to which execution costs of options trading interacts with their underlying stocks. In this paper, we investigate whether the Penny-Pilot program encourage investors to migrate their trading from the equity market to the options market e.g. by substituting short selling for put buying. Our results show that traders did indeed switch their trades. Overall, our results are consistent with the SEC’s stated mission of improving the option trading environment especially via reducing individual investors’ execution cost.

Information and communication infrastructure development and agro-food trade

The purpose of this paper is to provide an adapted gravity trade model to measure the influence of communication infrastructure development on agro-food trade. The adapted gravity trade model presents associations of bilateral agro-food trade between OECD countries with traditional gravity equation variables and particularly with variables of the information and communication infrastructure development. Using the adapted gravity trade model we find a positive association between the information and communication infrastructure development and bilateral agro-food trade flows between OECD countries. This association is significantly stronger for agricultural than for food products. The improved information and communication infrastructure development improves information and reduces trade transaction costs.

Immigrant effects and international business activity: an overview

PurposeThis paper aims to examine the myriad linkages between cross‐border migration and international business activity through a conceptual framework of international arbitrage.Design/methodology/approachWhile labour is internationally the least integrated of the various markets (capital, product, labour) the increasing co‐movement of both tasks and workers has created opportunities for the arbitrage and exploitation of differences between national labour markets. Because national labour markets typically display the two characteristics of separation and price discrepancy it is possible to utilise the principle of arbitrage and within this framework examine cost, intellectual, knowledge and employment arbitrage.FindingsThe discussion suggests that international business offers valuable insights into migration processes and effects which have been dominated by the research approaches of other disciplines. It is found that migrants can help reduce transaction costs for bilateral trade, contribute to nostalgic trade, encourage outsourcing and foreign direct investment through referrals and performance signalling, assist country of origin development through remittances and return migration and provide valuable knowledge to their employers in the country of residence.Research limitations/implicationsThe paper is a conceptual one which offers no new empirical results but does provide a context for the interpretation of the more specialised studies that appear in this special issue. There is a need for research on this topic to be firmly grounded in the contemporary context of an increasingly integrated global economy. It also suggests a number of specific areas where further work would be useful.Originality/valueThe key contribution of the paper is in developing a comprehensive conceptual framework – that of labour market arbitrage – which enables a clearer understanding of the complex impacts of international migration on international business activity. It also distinguishes between direct and indirect effects.

Water Rights and Markets in the U.S. Semi Arid West: Efficiency and Equity Issues

There are both high resource and political costs in defining and enforcing property rights to water and in managing it with markets. In this paper, I examine these issues in the semi-arid U.S. West where many of the intensifying demand and supply problems regarding fresh water are playing out. I begin by illustrating the current state of water markets in 12 western U.S. states. There are major differences in water prices across uses (agriculture, urban, environmental) and these differences appear to persist, suggesting that water markets have not developed fully enough to narrow the gaps. Moreover, there is considerable difference in the extent and nature of water trading across the western states, suggesting that water values and transaction costs of trade vary considerably across jurisdictions. I then turn to the resource and political costs of defining water rights and expanding the use of markets. In this discussion, efficiency and equity objectives play important, often conflicting, roles. This tension reflects the very social nature of the water resource.

Agricultural Trade Facilitation in Asia: Prioritising the Invisible Infrastructure

In the backdrop of the growing agricultural and food trade across Asia, this paper argues that the installed food safety and associated infrastructure could be seen as only necessary conditions whereas the sufficient conditions would be to make an enabling policy environment which would reduce the overall transaction costs of trade. Imports also assume equal importance and the arrival of duty-free raw materials for further processing and value addition enables more employment generation, higher income for stakeholders, and forward movement in the value chain. As tariffs do not account for a substantial influence on the course of trade and prices of many farm commodities, the attention has to turn towards the enabling policy regime specific to commodities and thereby the development of infrastructure which would encourage value addition and re-exports. Trade facilitation and infrastructure are often taken in the general sense at the policy level and only partly address the specific issues related to the reduction of risks and transaction costs in the context of agricultural trade, i.e. the invisible infrastructure such as easy documentation, customs procedures, regulatory regimes and mutual recognition. Different commodities have different requirements in terms of costs, time and reliability of logistics and trade facilitating policies are to be formulated taking into consideration a wider set of factors and indicators in the context of agricultural trade. JEL Codes: F13, F14, F18, Q17, Q18.

Trading Efficiency in Water Quality Trading Markets: An Assessment of Trade-Offs

Declining water quality as a result of increased nutrient leaching is a serious and growing concern, both internationally and in New Zealand. Water pollution issues have traditionally been addressed with command-and-control type regulation, but market-based nutrient trading schemes are becoming more widespread. In New Zealand, a cap-and-trade system has been implemented in Lake Taupo and another has been designed for Lake Rotorua. Despite the importance placed on avoiding transaction costs in water quality trading markets, there has been little discussion in the literature of practical policies to decrease these transaction costs, or any real assessment of when it is and is not optimal to decrease transaction costs. This paper begins to address these issues. We find that strong efforts to control time-of-trade transaction costs are most likely to be worthwhile in schemes with heterogeneous participants and large expected values and volumes of trading. The trading inefficiency that results from search and bargaining, and trade registration costs can be minimised at some cost. Regulators can reduce trade approval costs if they establish baseline leaching levels for all participants and design standardised leaching monitoring systems as part of the set-up of the system, and monitor all sources equally regardless of whether participants trade instead of estimating and approving changes in traders’ leaching at the time of each trade (as occurs in a baseline-and-credit system). Finally we find that while regulators may be tempted to restrict trading or increase measuring and monitoring requirements to increase the environmental certainty of a scheme’s outcome, environmental risk may be better addressed through a less certain but more stringent environmental target.

Alternative Trading Systems in Europe: Trading Performance by European Venues Post-MiFID

This article analyzes a sample of trading activity in Europe, spanning primary exchanges, dark pools, and displayed alternative venues, over the first three quarters of 2009. The article represents the first performance analysis of European venues since the implementation of MiFID. Alternative trading markets, and dark pools in particular, are found to add value relative to primary markets, in the sense of lower trading transaction costs. The risk of slippage also is greatest in primary markets, and dark venues perform better in this respect than the displayed alternative markets. Increased participation in dark pools also is found to be beneficial, and the benefits of higher participation rates increase with the relative size of an order. The aggregate results mask differences across alternative venues, and these differences are documented across five dark venues and between four displayed alternative markets. <b>TOPICS:</b>Exchanges/markets/clearinghouses, performance measurement, developed

Bangladesh trade potential: a dynamic gravity approach

Purpose – The main purpose of this paper is to identify the major determining factors of Bangladesh trade and to investigate whether the gravity model correctly explains Bangladesh's trade patterns and then estimate the global trade potential of Bangladesh using an augmented gravity model.Design/methodology/approach – Based on a panel data, a dynamic gravity model has used to estimate Bangladesh's trade potential with her major trading partners.Findings – One of the major findings of the paper is that a large part of Bangladesh's potential trade has remained unrealized. The estimated results indicate Bangladesh tends to trade more with larger economies in general and for import developing economies in particular. The rising trade transaction cost is one of the major trading barriers causing high unrealization of trade potential in Bangladesh.Practical implications – The paper concludes that liberalization of non‐policy barriers will spur Bangladesh's trade, particularly in time of ongoing global economic ...

Fund Flow Volatility and Performance

AbstractThis paper provides a detailed analysis of the impact of daily mutual fund flow volatility on fund performance. I document a significant negative relationship between the volatility of daily fund flows and cross-sectional differences in risk-adjusted performance. This relationship is driven by domestic equity funds, as well as small funds, well-performing funds, and funds that experience inflows over the sample period. My results are consistent with performance differences arising from the transaction costs of nondiscretionary trading driven by daily fund flows, but not with performance differences arising from the suboptimal cash holdings that arise from fund flows.

The Role of Signal Precision and Transaction Costs in Stock, Option and Volatility Trading

In this study we examine the rationale behind informed traders decision to speculate on the volatility of the common stock by trading in the derivative or in the cash markets. Using a continuous-time trading model, we demonstrate that the quality of the private information regarding the volatility parameter together with the relative transaction costs observed in the various segments of the cash and derivatives markets will determine informed agents’ trading habitats. We further show that in the presence of imprecise volatility signals, only the “most sophisticated” traders (those with highly precise volatility signals) will engage in pure volatility bets. Traders with less precise signals will choose a naked option strategy, while traders at the low spectrum of the precision scale will invest in the underlying stock. Thus, the low volume of pure volatility trades observed by Lakonishok et al. (2007) does not necessarily imply that only fringe traders have chosen to speculate on volatility. Rather, it may suggest that the majority of informed traders do not have very precise volatility signals.

An approximate distribution of delta-hedging errors in a jump-diffusion model with discrete trading and transaction costs

We introduce a jump-diffusion model for asset returns with jumps drawn from a mixture of normal distributions and show that this model adequately fits the historical data of the S&P500 index. We consider a delta-hedging strategy (DHS) for vanilla options under the diffusion model (DM) and the proposed jump-diffusion model (JDM), assuming discrete trading intervals and transaction costs, and derive an approximation for the probability density function (PDF) of the profit-and-loss (P&L) of the DHS under both models. We find that, under the log-normal model of Black–Scholes–Merton, the actual PDF of the P&L can be well approximated by the chi-squared distribution with specific parameters. We derive an approximation for the P&L volatility in the DM and JDM. We show that, under both DM and JDM, the expected loss due to transaction costs is inversely proportional to the square root of the hedging frequency. We apply mean–variance analysis to find the optimal hedging frequency given the hedger's risk tolerance. Since under the JDM it is impossible to reduce the P&L volatility by increasing the hedging frequency, we consider an alternative hedging strategy, following which the P&L volatility can be reduced by increasing the hedging frequency.

The Role of Signal Precision and Transaction Costs in Stock, Option and Volatility Trading

In this study, we examine the rationale that informed traders use in choosing various financial instruments in order to speculate on the volatility of the underlying asset, here a common stock. Using a continuous-time trading model, we demonstrate that the quality of the private information regarding the volatility parameter together with the relative transaction costs observed in the various segments of the cash and derivatives markets will determine informed agents’ trading habitats. We further show that in the presence of imprecise volatility signals, only the “most sophisticated” traders (those with highly precise volatility signals) will engage in pure volatility bets. Traders with less precise signals will choose a naked option strategy, while traders at the low spectrum of the precision scale will invest in the underlying stock. Thus, the low volume of pure volatility trades observed by Lakonishok et al. (2007) does not necessarily imply that only fringe traders have chosen to speculate on volatility. Rather, it may suggest that the majority of informed traders do not have precise volatility signals.

The Role of Signal Precision and Transaction Costs in Stock, Option and Volatility Trading

In this study, we examine the rationale that informed traders use in choosing various financial instruments in order to speculate on the volatility of the underlying asset, here a common stock. Using a continuous-time trading model, we demonstrate that the quality of the private information regarding the volatility parameter together with the relative transaction costs observed in the various segments of the cash and derivatives markets will determine informed agents’ trading habitats. We further show that in the presence of imprecise volatility signals, only the “most sophisticated” traders (those with highly precise volatility signals) will engage in pure volatility bets. Traders with less precise signals will choose a naked option strategy, while traders at the low spectrum of the precision scale will invest in the underlying stock. Thus, the low volume of pure volatility trades observed by Lakonishok et al. (2007) does not necessarily imply that only fringe traders have chosen to speculate on volatility. Rather, it may suggest that the majority of informed traders do not have precise volatility signals.

Which Factors Influence Trading Costs in Global Equity Markets?

This article examines global trends in equity-related transaction costs and trading volume by identifying recent patterns in institutional brokerage commissions, indirect trading costs, and trading activity. The results indicate a steady decline in brokerage commissions around the world, but indirect trading costs appear to have reached a plateau. The fastest growth in trading volume can be found in the emerging markets of South America, but the United States leads the way in terms of the steepest reductions in transaction costs. The empirical evidence also shows there is a simultaneous relationship between global equity trading volume and transaction costs that is driven by trends in both U.S. and local equity markets. This suggests that global investors are likely becoming more cost-sensitive and increasingly open to directing orders to those international markets where transaction costs are lower.

Informed trading in the index option market: The case of KOSPI 200 options

AbstractThis study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse‐selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse‐selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one‐third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse‐selection costs are positively related with option delta. Our regression analysis shows that option‐related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1118–1146, 2008

Alternatives to Expedite Macroeconomic Convergence of the SADC Countries

Countries comprising of the Southern African Development Community (SADC) region show satisfactory progress with the achievement of the region’s macroeconomic convergence goals. Five countries achieved all four goals set for 2008 already in 2006; five achieved three of the goals and the other four achieved two goals. In addition, countries in the SADC region have achieved their target for the establishment of a free trade area. The achievement of these goals supports SADC’s ultimate objective of establishing a regional central bank with a single regional currency by 2016. Since 1857, European experiences with monetary unions have shown that unification can at best be regarded as a challenging prospect for any region. Judged in terms of the European experience, SADC does not face insurmountable challenges in its quest for monetary unification and a single central bank. However, governments of countries in the SADC region should consider whether a regional central bank should follow discretionary monetary policy catering for particular economic shocks, or monetary policy based on rules using a monetary policy anchor. Neither approach leaves easy choices, as governments of SADC countries would have to establish a structure to consider and select a monetary policy framework. At a microeconomic level, the benefits of establishing a regional central bank and adopting a single regional currency are to free private enterprises, business firms and individuals from transaction costs in intraregional trade and travel. It will also increase price transparency and competition between countries and stabilize consumer prices in countries suffering prolonged inflation due to sustained exchange rate depreciation. Four initiatives can enhance SADC’s progress. First, the macroeconomic convergence criteria should be clarified and the timely publication of macroecoInt Adv Econ Res (2008) 14:479–480 DOI 10.1007/s11294-008-9183-6

Trade Facilitation in Africa: Challenges and Possible Solutions

Africa’s economic development partly depends on reduction of trade transaction costs, which are currently unacceptably high. Therefore, many African governments, working together with international organisations like the United Nations Conference on Trade &amp; Development (UNCTAD), the World Bank, World Customs Organization (WCO) and the World Trade Organization (WTO), have in recent years implemented initiatives that have led to improvement of trade facilitation. In this regard, customs reform and modernisation initiatives in Africa inevitably include elements of trade facilitation. In addition to government initiatives, the private sector has recently organised itself to address the challenges of trade facilitation in Africa. Entry of the private sector requires a convergence of interests with government so as to reduce the existing disconnect in government-private sector relations. This article highlights the progress made in trade facilitation, existing challenges, and customs compliance management imperatives for businesses operating in Africa.

Customs and Trade Facilitation: From Concepts to Implementation

Trade facilitation is the simplification, harmonisation, standardisation and modernisation of trade procedures. It seeks to reduce trade transaction costs at the interface between business and government and is an agenda item within many customs related activities. These include WTO trade round negotiations, supply chain security initiatives, development and capacity building programs, as well as many customs modernisation programs. However, the implementation of trade facilitation principles is fraught with obstacles. Obstacles identified in this paper include conflicting interests, institutional limitations and lack of knowledge. Policy makers and project managers stand to gain from more substantiated research aimed at deepening their understanding of crossborder operations, its inherent dynamics, stakeholder interests and institutional limitations. Currently such knowledge is seldom found in one place.