Download or read book Effects of Information Asymmetry on Market Liquidity written by Richard Co and published by . This book was released on 2000 with total page 172 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Asymmetric Information and the Market Structure of the Banking Industry written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 1998-06-01 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper analyzes the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. All lenders face uncertainty with regard to borrowers’ creditworthiness, but, in the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. These informational asymmetries are an important determinant of the industry structure and may represent a barrier to entry for new banks. The paper shows that, in contrast with traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of fixed costs.

Download or read book Market Liquidity written by Thierry Foucault and published by Oxford University Press. This book was released on 2023 with total page 531 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The process by which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. This book offers a more accurate and authoritative take on this process. The book starts from the assumption that not everyone is present at all times simultaneously on the market, and that participants have quite diverse information about the security's fundamentals. As a result, the order flow is a complex mix of information and noise, and a consensus price only emerges gradually over time as the trading process evolves and the participants interpret the actions of other traders. Thus, a security's actual transaction price may deviate from its fundamental value, as it would be assessed by a fully informed set of investors. The book takes these deviations seriously, and explains why and how they emerge in the trading process and are eventually eliminated. The authors draw on a vast body of theoretical insights and empirical findings on security price formation that have come to form a well-defined field within financial economics known as "market microstructure." Focusing on liquidity and price discovery, the book analyzes the tension between the two, pointing out that when price-relevant information reaches the market through trading pressure rather than through a public announcement, liquidity may suffer. It also confronts many striking phenomena in securities markets and uses the analytical tools and empirical methods of market microstructure to understand them. These include issues such as why liquidity changes over time and differs across securities, why large trades move prices up or down, and why these price changes are subsequently reversed, and why we observe temporary deviations from asset fair values"--

Download or read book Asymmetric Information and Financial Markets written by G. Manjunatha and published by Ary Publisher. This book was released on 2023-06-10 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This econometric analysis focuses on the relationship between asymmetric information and financial markets. The study aims to examine how the presence of asymmetric information affects market dynamics and outcomes. By utilizing advanced statistical techniques and econometric modeling, the research investigates the impact of information asymmetry on various financial market variables. The study analyzes the role of information asymmetry in influencing market efficiency, price formation, trading volume, and investor behavior. It explores how differences in information between market participants lead to market inefficiencies, such as mispricing and suboptimal trading strategies. Additionally, the research investigates the implications of asymmetric information for market liquidity, volatility, and the overall stability of financial markets. Through the econometric analysis, the study provides empirical evidence and insights into the effects of asymmetric information on financial markets. It aims to contribute to the existing literature by shedding light on the mechanisms through which information asymmetry influences market dynamics and outcomes. The findings have practical implications for investors, financial institutions, and policymakers, helping to enhance market transparency, investor protection, and the efficiency of financial markets. Overall, this econometric analysis delves into the relationship between asymmetric information and financial markets. By employing rigorous statistical techniques, it aims to understand the impact of information asymmetry on market variables, providing valuable insights for market participants and stakeholders. The research ultimately seeks to contribute to the understanding of market dynamics and inform strategies to mitigate the adverse effects of information asymmetry in financial markets.

Download or read book Financial Markets Asymmetric Information and Macroeconomic Equilibrium written by Fabrizio Mattesini and published by Dartmouth Publishing Company. This book was released on 1993 with total page 208 pages. Available in PDF, EPUB and Kindle. Book excerpt: The study of the interaction between the financial sector and the sector of the economy is one of the most recent advances in macroeconomic theory. While mainstream economics assigns a passive role to the financial sector there is a growing body of literature which emphasizes the importance of financial intermediaries in explaining fluctuations and the determination of the process through which monetary policy impulses are transmitted to the rest of the economy. This literature has its origin in the models that rely on asymmetric information to explain imperfections in financial markts and in empirical evidence collected through various econometric techniques and through historical studies. This book surveys the relevant work ion the subject, evaluates the empirical evidence and the explanatory power of the theories proposed and furnishes new and empirical results.

Download or read book Inside and Outside Liquidity written by Bengt Holmstrom and published by MIT Press. This book was released on 2013-01-11 with total page 263 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two leading economists develop a theory explaining the demand for and supply of liquid assets. Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. In Inside and Outside Liquidity, leading economists Bengt Holmström and Jean Tirole offer an original, unified perspective on these questions. In a slight, but important, departure from the standard theory of finance, they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective, private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.

Download or read book Information Asymmetry Divergence of Opinions and Firm Specific Liquidity written by Mohammad Tayeh and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This research examines the relationship between firm-specific liquidity and both information asymmetry and divergence of opinion, within the context of different trading system (i.e. floor versus electronic), for UK, Swiss and German stock markets. By using both univariate and multivariate analysis, the results, in general, show that firms with low (high) levels of information asymmetry between company managers and outside investors have high (low) liquidity. However, the evidence concerning the impact of divergence of opinion among investors on liquidity is mixed. We find that divergence of opinion is positively related to all measures of liquidity during the two sub-samples periods, before and after automation. That is, while the positive relation between divergence of opinion and both proportional bid-ask spread and price impact support the risk view of divergence of opinion, the positive relation between divergence of opinion and turnover ratio supports the optimistic view. The results also show that the impact of information asymmetry and divergence of opinion on firm-specific liquidity is different across trading systems. That is, the results show that in most cases for all markets, the impact of information asymmetry (divergence of opinion) on firm-specific liquidity on floor (electronic) trading systems is lesser than that on electronic (floor) trading systems. This implies that different trading systems could affect differently the informational environment of firms, and thus affect the impact of information asymmetry and divergence of opinion on liquidity. However, after allowing for the market-wide and industry-wide information, the results show that both information asymmetry and divergence of opinion have no additional explanatory power. This implies that both market and industry factors are able to explain the cross-sectional variation in firm-specific liquidity, which puts into question the role of financial analysts and the value of the information they provide to investors in the market.

Download or read book The Role of Informational Asymmetries in Financial Markets and the Real Economy written by Victoria Magdalena Vanasco and published by . This book was released on 2014 with total page 110 pages. Available in PDF, EPUB and Kindle. Book excerpt: The stability of national and, increasingly more often, the global economy relies on well-functioning financial markets. Households' consumption and saving decisions, firms' investment choices, and governments' financing strategies critically depend on the stability of financial markets. These markets, however, are composed of individuals and institutions that may have different objectives, information sets, and beliefs, making them a very complex object that we do not fully comprehend. Motivated by this, my dissertation focuses on understanding how informational asymmetries and belief heterogeneity impact financial markets, and therefore, the macro economy. More specifically, this dissertation explores the sources of informational asymmetries among market participants. How do different financial market structures provide incentives for private information acquisition? Is information acquisition desirable? What types of policies can be implemented to increase liquidity and "discipline" in financial markets? Could business cycles be related to information or belief cycles? I tackle these questions from three separate angles. First, I study how alternative market designs bring forth different levels of private information generation, "market discipline," and liquidity. Second, I investigate how information sets of key market participants are determined. Finally, I focus on how information and belief fluctuations may affect key macroeconomic variables and economic fluctuations. In Chapter 1, ``Information Acquisition vs. Liquidity in Financial Markets," I propose a parsimonious framework to study markets for asset-backed securities (ABS). These markets play an important role in providing lending capacity to the banking industry by allowing banks to sell the cashflows of their loans and thus recycle capital and reduce the riskiness of their portfolios. In the financial crash of 2008, however, in which certain ABS played a substantial role, we witnessed a collapse in the issuance of all ABS classes. Given the importance of these markets for the real economy, policy makers in the US and Europe have geared their efforts towards reviving them. A good framework to think about these markets is imperative when thinking about financial regulation. The contribution of this chapter is to propose a model that captures the two main problems that have been shown to be present in the practice of securitization. First, the increase in securitization has led to a decline in lending standards, suggesting that liquid markets for ABS reduce incentives to issue good quality loans. Second, securitizers have used private information about loan quality when choosing which loans to securitize, indicating that a problem of asymmetric information is present in ABS markets. A natural question then arises: how should ABS be designed to provide incentives to issue good quality loans and, at the same time, to preserve liquidity and trade in these markets? To address this question, I propose a framework to study ABS where both incentives and liquidity issues are considered and linked through a loan issuer's information acquisition decision. Loan issuers acquire private information about potential borrowers, use this information to screen loans, and later design and sell securities backed by these loans when in need of funds. While information is beneficial ex-ante when used to screen loans, it becomes detrimental ex-post because it introduces a problem of adverse selection that hinders trade in ABS markets. The model matches key features of these markets, such as the issuance of senior and junior tranches, and it predicts that when gains from trade in ABS markets are `sufficiently' large, information acquisition and loan screening are inefficiently low. There are two channels that drive this inefficiency. First, when gains from trade are large, a loan issuer is tempted ex-post to sell a large portion of its cashflows and thus does not internalize that lower retention implements less information acquisition. Second, the presence of adverse selection in secondary markets creates informational rents for issuers holding low quality loans, reducing the value of loan screening. This suggests that incentives for loan screening not only depend on the portion of loans retained by issuers, but also on how the market prices the issued tranches. Turning to financial regulation, I characterize the optimal mechanism and show that it can be implemented with a simple tax scheme. The obtained results, therefore, contribute to the recent debate on how to regulate markets for ABS. In Chapter 2, I present joint work with Matthew Botsch, ``Learning by Lending, Do Banks Learn?" where we investigate how banks form their information sets about the quality of their borrowers. There is a vast empirical and theoretical literature that points to the importance of borrower-lender relationships for firms' access to credit. In this chapter, we investigate one particular mechanism through which long-term relationships might improve access to credit. We hypothesize that while lending to a firm, a bank receives signals that allow it to learn and better understand the firm's fundamentals; and that this learning is private; that is, it is information that is not fully reflected in publicly-observable variables. We test this hypothesis using a dataset for 7,618 syndicated loans made between 1987 and 2003. We construct a variable that proxies for firm quality and is unobservable by the bank, so it cannot be priced when the firm enters our sample. We show that the loading on this factor in the pricing equation increases with relationship time, hinting that banks are able to learn about firm quality when they are in an established relationship with the firm. Our finding is robust to controlling for market-wide learning about firm fundamentals. This suggests that a significant portion of bank learning is private and is not shared by all market participants. The results obtained in this study underpin one of the main assumptions of the model presented in Chapter 1: that banks have a special ability to privately acquire valuable information about potential borrowers. While the model is static, the data suggests that the process of lending and of information acquisition is a dynamic one. Consistent with this, the last chapter of this dissertation studies the macroeconomic implications of dynamic learning by financial intermediaries. Chapter 3 presents joint work with Vladimir Asriyan titled ``Informed Intermediation over the Cycle." In this paper, we construct a dynamic model of financial intermediation in which changes in the information held by financial intermediaries generate asymmetric credit cycles as the one observed in the data. We model financial intermediaries as ''expert'' agents who have a unique ability to acquire information about firm fundamentals. While the level of ''expertise'' in the economy grows in tandem with information that the ''experts'' possess, the gains from intermediation are hindered by informational asymmetries. We find the optimal financial contracts and show that the economy inherits not only the dynamic nature of information flow, but also the interaction of information with the contractual setting. We introduce a cyclical component to information by supposing that the fundamentals about which experts acquire information are stochastic. While persistence of fundamentals is essential for information to be valuable, their randomness acts as an opposing force and diminishes the value of expert learning. Our setting then features economic fluctuations due to waves of ``confidence'' in the intermediaries' ability to allocate funds profitably.

Download or read book Liquidity and Asset Prices written by Yakov Amihud and published by Now Publishers Inc. This book was released on 2006 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.

Download or read book Asymmetric Information Corporate Finance and Investment written by R. Glenn Hubbard and published by University of Chicago Press. This book was released on 2009-05-15 with total page 354 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this volume, specialists from traditionally separate areas in economics and finance investigate issues at the conjunction of their fields. They argue that financial decisions of the firm can affect real economic activity—and this is true for enough firms and consumers to have significant aggregate economic effects. They demonstrate that important differences—asymmetries—in access to information between "borrowers" and "lenders" ("insiders" and "outsiders") in financial transactions affect investment decisions of firms and the organization of financial markets. The original research emphasizes the role of information problems in explaining empirically important links between internal finance and investment, as well as their role in accounting for observed variations in mechanisms for corporate control.

Download or read book Remedies to Informational Asymmetries in Stock Markets written by Peter-Jan Engelen and published by Intersentia nv. This book was released on 2005 with total page 4 pages. Available in PDF, EPUB and Kindle. Book excerpt: Like many other markets, stock markets are characterised by asymmetric information. If investors cannot distinguish high-quality from low-quality securities, they will value all securities as average resulting in the well known market for lemons. This decreases the allocative efficiency and social welfare by guiding resources to the least good investment opportunities. How can high-quality listed companies communicate with stock markets to distinguish themselves from low-quality listed companies? Although proponents of mandatory disclosure rules in securities markets will answer this question with far-reaching governmental regulation, it is jumping to conclusions and skipping devices that signal the true quality of the investment opportunities to the stock market. This book analyses the functioning of stock markets, in particular the dissemination of price-sensitive information on these markets. In order to evaluate the legal rules governing the dissemination of information from an economic perspective, an operational framework is needed to assess the current disclosure regulation with respect to allocative efficiency. The book replaces vague legal goals of securities regulation, such as investors' protection, by financial economic concepts, such as market efficiency and market liquidity. To enhance allocative efficiency, the book analyses the relevancy of mandatory disclosure rules, the use of trading halts in disseminating information during the opening hours of a stock exchange, the use of selective disclosure and the regulation of insider trading.

Download or read book The Real Effects of Stock Market Liquidity written by Ying Xia and published by Open Dissertation Press. This book was released on 2017-01-26 with total page 124 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation, "The Real Effects of Stock Market Liquidity" by Ying, Xia, 夏颖, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: One important line of literature in finance studies the real effects of stock market on the economy. Following this area of research, I investigate whether stock market liquidity can affect firm's real economic activities. This thesis consists of two empirical studies about the effects of stock market liquidity on firm's default risk and manager's earnings manipulation. The first chapter examines the impact of stock liquidity on firm default risk. Default occurs when a firm's cash flows are insufficient to cover its debt service costs and principal payments. I show that firms with more liquid stocks have lower default risk. Using the Securities and Exchange Commission's decimalization regulation as a shock to stock market liquidity, I establish that enhanced stock liquidity causally decreases default risk. Then I find two mechanisms through which liquidity reduces firm default risk: through improving stock price informational efficiency, and facilitating corporate governance by blockholders. Of the two mechanisms, informational efficiency channel has higher explanatory power than the corporate governance channel. The second chapter studies the relationship between stock market liquidity and earnings management. Earning management occurs when managers exercise their discretions over the choices of accounting methods or operational activities with the objective to influence the reported earnings. Using a sample of U.S. public firms over the time period from 1993 to 2012, I find that firms with more liquid stocks have lower level of both real and accrual-based earnings management. The result is robust to the use of various measures of liquidity. I address the endogeneity problem by using instrumental variable approach and a source of exogenous shocks to stock liquidity, i.e. Decimalization regulation. These methods provide evidence of a causal effect of liquidity on earnings management. I further find that liquidity curbs earnings management by mitigating the information asymmetry between managers and shareholder and facilitating governance by large institutional investors. Subjects: Liquidity (Economics) Stock exchanges

Download or read book Two Theories on Information Asymmetry in Finance written by Te-Chien Lo and published by . This book was released on 2012 with total page 121 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation includes two essays which investigate the effects of information asymmetry in liquidity risk pricing and in agency problems. The brief abstracts of these two essays are presented as follows. The first essay investigates how a risk averse liquidity provider sets optimal limit order book under information asymmetry. I extend the model proposed by Copeland and Galai (1983). First, in response to increasing trade size, a severe risk averse liquidity provider offers convex negatively-sloped bid curves and concave positively-sloped ask curves under information asymmetry. In addition, the simultaneous existence of the risk averse liquidity provider and market information asymmetry is the necessary condition that the liquidity provider offers negatively-sloped bid curves and positively-sloped ask curves. Both numerical analysis and empirical evidence on the limit order book of Taiwan Index Futures support the findings in this essay. In the second essay, I investigate the effects of information asymmetry under the two-tiered agency problem which is commonly observed in a typical organizational structure. I propose the two-tiered agency model and shows that imposing Joint Responsibility policy between Agent_1 (Chief Executive Officer) and Agent_2 (Chief Financial Officer) is NOT a good policy for Principal (Shareholders). Joint Responsibility is that Agent_1 is accused of not identifying in advance Agent_2 who takes on destructive risky projects. I design two cases (Case_1 excludes Joint Responsibility and Case_2 includes it) and prove that Principal's payoffs in Case_1 weakly dominate that in Case_2. In addition, static comparative analysis shows that how the change of the losses from the bad state of the high risky project, or the parameter of Agent_1's monitoring costs, alters Agent_1's monitoring and Principal's payoffs in equilibrium.

Download or read book Liquidity Information Asymmetry Divergence of Opinion and Asset Returns written by Guangchuan Li and published by . This book was released on 2008 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the independent and dominating effects of the liquidity level, the information asymmetry and the divergence of opinion on asset returns in an important emerging market, Chinese stock market. We use the variable ILLIQ from Amihud (2002) to proxy for the liquidity level, the variable PIN from Easley, Hvidkjaer, and O'Hara (2002) to proxy for the information asymmetry and the variable OBS based on Naes and Skjeltorp (2006) to proxy for the divergence of opinion. We find striking evidence that stocks with a higher liquidity level, or a lower information asymmetry, or a lower divergence of opinion, experience significantly lower excess returns. More importantly, the explanatory power of the liquidity level on asset returns may only reflect those from either the information asymmetry or the divergence of opinion. Moreover, we find no evidence on the dominating effect between the information asymmetry and the divergence of opinion when examining their impact on asset returns. These further findings verify the fact that the information asymmetry and the divergence of opinion both affect the liquidity level and meanwhile, the asymmetric information seems only partly to explain the dispersed beliefs among investors in Chinese stock market.

Download or read book Asymmetric Information in Financial Markets written by Ricardo N. Bebczuk and published by Cambridge University Press. This book was released on 2003-08-21 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asymmetric information (the fact that borrowers have better information than their lenders) and its theoretical and practical evidence now forms part of the basic tool kit of every financial economist. It is a phenomenon that has major implications for a number of economic and financial issues ranging from both micro and macroeconomic level - corporate debt, investment and dividend policies, the depth and duration of business cycles, the rate of long term economic growth - to the origin of financial and international crises. Asymmetric Information in Financial Markets aims to explain this concept in an accessible way, without jargon and by reducing mathematical complexity. Using elementary algebra and statistics, graphs, and convincing real-world evidence, the author explores the foundations of the problems posed by asymmetries of information in a refreshingly accessible and intuitive way.

Download or read book Effects of Asymmetric Information on Market Timing in the Mutual Fund Industry written by Vanessa S. Tchamyou and published by . This book was released on 2018 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper investigates the effects of information asymmetry (between the realised return and the expected return) on market timing in the mutual fund industry. For the purpose, we use a panel of 1488 active open-end mutual funds for the period 2004-2013. We use fund-specific time-dynamic betas. Information asymmetry is measured as the standard deviation of idiosyncratic risk. The dataset is decomposed into five market fundamentals in order to emphasis the policy implications of our findings with respect to (i) equity, (ii) fixed income, (iii) allocation, (iv) alternative and (v) tax preferred mutual funds. The empirical evidence is based on endogeneity-robust Difference and System Generalised Method of Moments. The following findings are established. First, information asymmetry broadly follows the same trend as volatility, with a higher sensitivity to market risk exposure. Second, fund managers tend to raise (cutback) their risk exposure in time of high (low) market liquidity. Third, there is evidence of convergence in equity funds. We may therefore infer that equity funds with lower market risk exposure are catching-up with their counterparts with higher exposure to fluctuation in market conditions. The paper complements the scarce literature on market timing in the mutual fund industry with time-dynamic betas, information asymmetry and an endogeneity-robust empirical approach.

Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.