Liquidity Trading Research Articles

Analisis Stock Split Berdasarkan Ukuran Perusahaan dan Market to Book Ratio Saham di Bursa Efek Indonesia

A stock split is a corporate action aimed at increasing trading liquidity. Where is carried out when the stock price is overvalued and reduces the ability of investors to buy the stock. The announcement of the stock split contains information that will be responded positively by investors. Company size and market to book ratio are company characteristics that can have an impact on investor response. Therefore, this study aims to analyze the difference in abnormal returns before and after the stock split by considering the size of the company and the market to book ratio. The research sample is a company that did a stock split in 2005-2019 with a total sample of 117 stocks. The results show that there is no difference in abnormal returns before and after the announcement of the stock split in companies with large and small sizes. However, there are differences in abnormal returns in medium-sized companies. Meanwhile, based on the market to book ratio, both companies with high and low market to book ratios have differences in abnormal returns before and after the announcement of the stock split.

Trading Activity in Public Real Estate Markets

Trading activity is an important characteristic of financial markets, since it is related to price discovery, volatility, and market liquidity. It is therefore of crucial importance to understand what drives trading activity in real estate markets. Here, we use a panel dataset consisting of 142 US REIT stocks observed over almost 20 years and a fixed-effects regression approach to link variation in trading activity to proxies for different trading motives (theory-motivated). The paper shows that the drivers of trading activity in real estate markets are distinct from those in the broader equity market. Proxies for portfolio rebalancing needs and liquidity trading are shown to be important trading motives in REIT markets. However, unlike in the broader equity market, difference of opinions and information-based trading motives seem to play a minor role for REIT trading activity.

Exchange-Traded Funds Ownership and Stock Volatility

This study investigates whether exchange-traded funds (ETFs) increase the nonfundamental volatility of stocks in their baskets via the arbitrage channel. Since the price and the net asset value of the ETF underlying stocks are tied by arbitrage, liquidity shocks to the ETFs may propagate to the underlying stocks through arbitrage trading, which is called the liquidity trading hypothesis. We test the implications of this hypothesis using a sample of ETFs that track the KOSPI200 index. We address the potential endogenous relationship between ETF ownership and stock volatility using the KOSPI200 index reconstitution event as an instrumental variable in the two-stage least squares regression framework; we find the effect of ETF ownership on stock volatility is positive and significant. We also provide empirical evidence that foreign and domestic institutional investors exhibit more frequent trading in the opposite direction and higher-order imbalances for stocks with higher ETF ownership. In summary, our findings suggest that the growth of the ETFs in the Korean stock market may have had an unintended consequence of the higher volatility of ETFunderlying stocks.

When Does The Tail Wag The Dog? Curvature and Market Making

Liquidity and trading activity on constant function market makers (CFMMs) such as Uniswap, Curve, and Balancer has grown significantly in the second half of 2020. Much of the growth of these protocols has been driven by incentivized pools or 'yield farming', which reward participants in crypto assets for providing liquidity to CFMMs. As a result, CFMMs and associated protocols, which were historically very small markets, now constitute the most liquid trading venues for a large number of crypto assets. But what does it mean for a CFMM to be the most liquid market? In this paper, we propose a basic definition of price sensitivity and liquidity. We show that this definition is tightly related to the curvature of a CFMM's trading function and can be used to explain a number of heuristic results. For example, we show that low-curvature markets are good for coins whose market value is approximately fixed and that high-curvature markets are better for liquidity providers when traders have an informational edge. Additionally, the results can also be used to model interacting markets and explain the rise of incentivized liquidity provision, also known as 'yield farming.'

Data-driven analysis on optimal purchasing decisions in combined procurement

With the development of information technology, big data analysis has been highlighted in operations and management. From this viewpoint, this paper studies a buyer's optimal purchasing decisions in combined procurement. For combined procurement, a buyer first signs a long-term contract with a supplier to guarantee a certain level of commodity supply, and can then replenish the commodities from the spot market if necessary. The optimal purchasing quantity in the long-term contract is examined to maximise the buyer's expected profit from combined procurement. In view of the imperfectness in the spot market, the spot trading liquidity is considered in the buyer's optimal purchasing decision. The properties of the two optimal purchasing quantities are examined and several interesting results are obtained. For example, it is illustrated that a buyer's expected profit may decrease in the spot capacity, a result that has never appeared in the existing literature, which reveals the importance of a buyer's optimal order decision in the presence of spot replenishment. Numerical results and sensitivity analysis are performed to verify the results. Management insights are suggested for a buyer's optimal purchasing decisions in combined procurement with a long-term contract and spot replenishment.

The impact of Robinhood traders on the volatility of cross-listed securities

This study investigates the impact of Robinhood investors' participation on the volatility of American depository receipts (ADRs). Using data on Robinhood account holdings in 382 ADRs from 33 countries around the globe, we show that their activity amplifies the cross-listed securities volatility. While Robinhood investors' involvement has soared in recent years, seemingly supplying additional trading liquidity, this provision appears to be associated with a deterioration of ADR stability. The detrimental effect holds across the COVID-19 period and is not subsumed by home-country pandemic intensity measures. Since the law of one price suggests that increased ADR volatility will negatively impact the underlying stocks in their home markets, our results have important implications for various government and market policy makers as well as for home-country firms considering cross-listing their stocks.

Strengthening the Treasury Market

For more than 200 years, the market for U.S. Treasury securities has propelled U.S. economic success. More recently, it has been described as the world’s most important financial market because Treasury securities promote liquidity, price discovery, and economic stability across the globe. Despite its vital role at home and abroad, the Treasury market lacks certain structural protections that are common in other advanced financial markets. Bringing the Treasury market into the modern age is necessary because it is not immune to the risks that confront other financial markets. This was underscored in early 2020, when the coronavirus (COVID-19) pandemic roiled the Treasury market, producing significant trading disruptions and liquidity constraints. 
 To help reduce the risk of future Treasury market instability, this Article recommends modest enhancements that have proven successful in similar markets. Robust public reporting of Treasury securities trades, improved oversight of trading venues, safeguards that promote operational resiliency, and expanded central clearing will promote Treasury market strength and resiliency well into the future.

Intraday Market Timing of Liquidity Trading and its Implication for Asset Pricing

Intraday Market Timing of Liquidity Trading and its Implication for Asset Pricing

Implications of Multiple Equilibria in a Short-Term Market with Persistent Liquidity Trading

Implications of Multiple Equilibria in a Short-Term Market with Persistent Liquidity Trading

Existence of multiple equilibria in a short-term market with persistent liquidity trading

There is an extensive body of theory on information heterogeneity, the impact of higher order beliefs and short-termism on asset pricing, yet empirical studies testing their implications are scarce. The objective of this paper is to provide empirical evidence on the existence of multiple equilibria in a marked short-term stock market, Borsa Istanbul. Results indicate existence of two extremal equilibria with distinct levels of volatility, liquidity and informativeness under persistent liquidity trading.

Flying under the radar: The real effects of anonymous trading

Using unique data on TSX Attributed Trading and a new proxy of Tobin's Q that accounts for intangible capital (Peters and Taylor, 2017), we investigate the impact of anonymous trading (AT) on managers' ability to use feedback conveyed by stock prices to improve investment efficiency. We show that AT reduces investment efficiency and that both anonymous buyer-initiated and seller-initiated trades have comparable effects. The negative effect of AT on managerial learning from stock prices is significant only for tangible investments and when disagreement among anonymous traders is high. Taken together, our new evidence indicates that AT distorts investment sensitivity to Tobin's Q, plausibly because anonymity attracts additional (uninformed) liquidity trading, which negatively impacts the effectiveness of asset prices in aggregating private information and in revealing fundamentals.

Snowballing private information

We study informational efficiency in a model of strategic dynamic trade with a monopolistic informed trader. The informed trader continuously receives information about the growth rate of asset dividends and trades against market makers and liquidity traders. We show that when the private information is multi-dimensional, or growth rate of expected dividends is relatively high, private information snowballs over time and the informed trader reveals his information about the asset with delay. This contrasts with the informational efficiency of the workhorse model with one-dimensional information and no growth (see Chau and Vayanos (2008) and Caldentey and Stacchetti (2010)). We also show that the extent of the steady-state excess price volatility is linear in the market's variance about the value.

Risk Capital Allocation under Market Liquidity Constraints

We develop measures of certain kinds of liquidity trading risk that is useful for completing the definition of market risk and for predicting liquidity-adjusted VaR (L-VaR) under illiquid market conditions. We argue that asset liquidity risk associated with the uncertainty of liquidating multiple-asset portfolios over a given holding period is a key factor in the computation of a credible risk-capital allocations in financial trading units.

Vertical tank capacity measurement based on Monte Carlo method.

Vertical tanks are commonly used appliances for liquids, and its capacity is very important for quantitative liquid ratio and liquid trade. In order to measure the capacity of vertical tanks more conveniently, this paper proposes a vertical tank capacity measurement method based on Monte Carlo Method. The method arranges a plurality of sensor points on the inner surface of the tank, and then performs Monte Carlo tests by generating a large number of random sample points, and finally calculates the capacity by counting the sample points that meet the criterion. The criterion for whether a sample point is located in the tank, which is the core issue, is established with the coordinates of sensor points and the distance between different sensor points along the surface of the tank. The results show that the absolute error of the measurement results of the proposed method does not exceed ±0.0003[m3], and the absolute error of capacity per unit volume has a linear relationship with the height of the vertical tank, and has little effect with the radial size of the vertical tank.

The Mirror of Malaysia Real Estate Investment Trust Stock Return in the Short-Run Dynamics

The formation of Islamic capital market under the subcomponent of Islamic financial system scratch a milestones development of Islamic finance in Malaysia. The Islamic capital market operates in mirror with convention capital market in expending, deepening and broadening Malaysia financial system. Malaysia is one of the REIT markets that value both the Islamic and conventional practices, such flexibility makes the attract not only to the local investor but also Islamic investors and foreign investor. The major source that generates income for REIT is the rental of the commercial real estate invested and hold as portfolio by the REIT management company. Furthermore, Malaysia REIT is known to be defensive stocks which consist of cyclic income producing assets that has some potential of asset appreciation. On the other hand, it witnessed by the moderation of Malaysia government bond yields created a lower pressure on the REIT stock price and analyst’s report highlighted the uncertainties on global crude oil prices and inflation is main concerned to REIT investors. In addition, the revision of 2019 tax system in Malaysia furnished a long run affected the dividend payout and volatility of REIT stock price. Therefore, this impact on the REIT stock liquidity and trading volume experiencing anil liquid trading. Therefore, the impact of external forces towards the mirror of two type of Malaysia REITs is significant to the investors, policy makers and government to outline the short-run relationship and facilitate future growth. The Vector auto regression model, granger causality and variance decomposition employed in this study to analyze the mirror of two types Malaysia REIT stock return. The empirical finding shows that the variability of dividend yield is vital explanatory variables to explain the both type of REIT stock return in Malaysia followed by interest rate for Islamic REIT stock return. The mirror of conventional REIT further implicated that trading volume and global crude oil price are useful to forecasting the changes in the stock return. Nutshell, this study provides a discussion of Malaysia REIT stock return behavior and it should be given necessary attention by researchers in ensuring the newly develop Islamic REIT are competitive and stability as the conventional REIT.

Black Monday Redux, Negative Oil Futures Retrospective

This paper examines the historic drop in West Texas Intermediate (“WTI”) oil futures contracts that occurred on April 20, 2020 as a result of significant events occurring at that time. While price movements around this time were jarring and raised the specter of ‘broken markets’, in reality, the futures contracts did what they were supposed to do, including the potential for negative pricing, and the physical oil markets took the price swings in stride and adapted accordingly. On the other hand, a conflux of low trading liquidity on the day and relative position of remaining market participants, some of whom were not extremely well-versed in the underlying intentions and terms of crude futures contracts, especially as it relates to taking physical delivery, temporarily increased volatility of the May20 WTI crude futures contract on the day prior to settlement. Given the ongoing democratization of investing, the events that played out illustrate the concept of ‘caveat emptor’ and the need for pro-active education in addition to reasonable safeguards in investment products and platforms.

Information Externalities Among Listed Firms

We establish the presence of sizeable information externalities across firms listed on U.S. stock exchanges. To identify externalities, we use staggered non-marginal increases in disclosure at peer firms that are unaccompanied by changes in mandatory disclosure at focal firms. We find that a peer firm's mandatory disclosure improves the focal firm's trading liquidity directly by reducing information asymmetry and indirectly by crowding in both voluntary disclosure and analyst information production at the focal firm. Positive information externalities, and the complementarities they operate through, support regulators’ use of mandatory disclosure to improve the market-wide information environment.

The effect of media coverage on target firms’ trading activity and liquidity around domestic acquisition announcements: evidence from UK

ABSTRACT This study investigates the effect of news media coverage on trading activity in, and the liquidity of, target firms’ shares around acquisition announcements. We use the number of articles published in four of the UK's main newspapers as a proxy for media coverage. Our dataset includes 350 UK domestic acquisition deals between 1996 and 2014. The results of our analysis suggest that media coverage is positively associated with target firms’ trading activity and stock liquidity. This is consistent with the media playing a key role in mitigating information asymmetry in the financial markets. This study contributes to the literature on stock market reactions to acquisition announcements by investigating the effect of media coverage on trading activity and stock liquidity beyond the price run-up, and by providing additional insights into the UK market which traditionally attracts less attention than the US market.

The asymmetric online talk effect

PurposeThe authors investigate the extent to which online talk can influence contemporaneous and future stock trading, especially when market news is unpresented.Design/methodology/approachThe authors propose an improved sentiment formula incorporating online hype, neutral sentiment and poster reputation. In addition, they conduct event study, OLS regression analyses and probit models.FindingsFirst, investors tend to be more talkative in relation to firms that are (1) smaller size, (2) more growth-like, (3) with lower prices and higher short interests and (4) of higher beta. Second, the bullish tone of investors positively affects the abnormal returns of small-capitalization stocks. However, online talk has little impact on large-capitalization stocks, except that more postings boost trading liquidity. Third, online talk predicts the presence of future news regardless of firm size, with stronger predictive power found for small-capitalization stocks.Practical implicationsIt is of interest to practitioners and researchers to study online talk so as to better understand the trading psychology of retail investors and the effects on the stock market. Furthermore, policymakers are interested in tracking activities on stock message boards in order to prevent security fraud and protect investors' interests.Originality/valueThe results are robust and suggest that online talk has significant impacts on stock trading exploiting an information asymmetry. This study of stock message board posting activities helps researchers to understand whether message contents contain valuable and unique content compared with information available via more traditional media channels.

Robust pricing under strategic trading

We study strategic trading with a market maker who does not know the joint distribution of public information and an asset's value, and hence cannot interpret information properly. Following a public event, a probabilistically informed trader who knows the distribution and liquidity traders trade. The market maker adopts a robust linear pricing strategy that has the best worst-case payoff guarantee. We show that such a strategy is equivalent to a two-step learning procedure, and characterize the unique linear equilibrium. Expected equilibrium prices exhibit underreaction to public information. If the trading frequency is arbitrarily high, the market maker fully reveals the distribution in the price eventually.