||Essays on Market Transparency and Price Discovery
||Department of Banking and Finance
||On March 25, 2002, Stock Exchange of Hong Kong introduces a new arrangement of extending trading session before open. The purpose of this study is to examine the impact of increasing transparency on bid-ask spreads, market depth, and price efficiency. The empirical results suggest that the intraday variations in spread display similarly J-shaped patterns, but the market depth shows a reverse J-shaped pattern. We also find that dollar and percentage quoted spread significant decrease as the trading activity increases. With the finding that wider spread after the new introduction, we suggest the asymmetric information component of spread may increase significantly following the open limit book of preopening trading session. The measurement of the amount of price discovery during preopening increases as the trading activity increases. Final, we also show in the context of price discovery process that the continuously increasing of the estimated slope of unbiasedness regression consists with more information incorporated into the price through the trading process.
||Abstract in Chinese： i
Abstract in English： ii
List of Tables iv
List of Figures v
Chapter 1 Introduction 1
Chapter 2 Market Structure 8
2.1. Trading mechanism 8
2.2. Data 10
2.3. Descriptive statistics 12
Chapter 3 Liquidity and Transparency 19
3.1 Introduction 19
3.2 Liquidity measurements 24
3.3 Hypotheses framework 30
3.4 Components of spread 44
Chapter 4 Price Discovery During the Preopening Period 51
4.1 Introduction 51
4.2 Descriptive statistics 54
4.3 Price discovery 57
Chapter 5 Conclusions 66
List of Tables
Table 2.1 Descriptive statistics 14
Table 3.1 Descriptive statistics 28
Table 3.2 Regression models for the relationship between depth and spread 36
Table 3.3 Changes in spread surrounding the event date 39
Table 3.4 Regression models for spreads 42
Table 3.5 Transition cost component of spread 50
Table 4.1: Weighted price contribution from open to close 61
List of Figures
Figure 1.1 Layout of the thesis 7
Figure 2.1 Distribution of volume and return volatility 16
Figure 2.2 Distribution of number of trades 17
Figure 2.3 Distribution of trading volume 18
Figure 3.1 Time of day for the spread and depth 31
Figure 3.2 Time of day for the percentage of spread and depth 32
Figure 3.3 Time of day for the standardized variation 33
Figure 4.1 Time of day for the volume and volatility 55
Figure 4.2 Time of day for the percentage volume and trades 56
Figure 4.3 Time of day for the spreads 57
Figure 4.4 Time of day for the weighted price contribution 59
Figure 4.5 Distribution of WPC 62
Figure 4.6 Unbiasedness regressions 64
Figure 4.7 RMSE of the unbiasedness regression 65
||Aggarwal, R. and Conroy, P., 2000, “Price Discovery in Initial Public Offerings and the Role of the Lead Underwriter,” Journal of Finance, 55, 2903-2922.
Ahn, H. J., Bae, K. H. and Chan, K., 2001, “Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong,” Journal of Finance, 56, 767-788.
Ahn, H. J. and Cheung, Y. L., 1999, “The Intraday Patterns of the Spread and Depth in a Market without Market Makers: The Stock Exchange of Hong Kong,” Pacific-Basin Finance Journal, 7, 539-556.
Amihud, Y. and Mendelson, H., 1987, “Trading Machanisms and Stock Returns: An Empirical Investigation,” Journal of Finance, 42, 533-553.
Amihud, Y. and Mendelson, H., 1991, “Volatility, Efficiency, and Trading: Evidence from the Japanese Stock Market,” Journal of Finance, 46, 1765-1789.
Bacidore, J. M. and Sofianos, G., 2002, “Liquidity Provision and Specialist Trading in NYSE-listed Non-U.S. Stocks,” Journal of Financial Economics, 63, 133-158.
Becker, B., Lopez, E., Berberi-Doumar, V., Cohn, R. and Adkins, A. S., 1993, “Automated Securities Trading,” Journal of Financial Services Research, 6, 327-341.
Barclay, M. J. and Hendershott, T., 2003, “Price Discovery and Trading after Hours,” Review of Financial Studies, 16, 1041-1073.
Barclay, M. J. and Hendershott, T., 2004, “Liquidity Externalities and Adverse Selection: Evidence from Trading after Hours,” Journal of Finance, 59, 681-710.
Barclay, M. J. and Hendershott, T., 2009, “A Comparison of Trading and Non-trading Mechanisms for Price Discovery,” Journal of Empirical Finance, 15, 839-849.
Barclay, M. J. and Warner, J. B., 1993, “Stealth Trading and Volatility : Which Trades Move Prices?” Journal of Financial Economics, 34, 281-305.
Baruch, S., 2005, “Who Benefits from an Open Limit-Order Book?” Journal of Business, 78, 1267–1306.
Biais, B., Hillion, P. and Spatt, C., 1999, “Price Discovery and Learning during the Preopening Period in the Paris Bourse,” Journal of Political Economy, 107, 1218-1248.
Bloomfield, R. and O’Hara, M., 1999,”Market Transparency: Who Wins and Who Loses,” Review of Financial Studies, 12, 5-35.
Bloomfield, R. and O’Hara, M., 2000, “Can Transparent Markets Survive?” Journal of Financial Economics, 55, 425-459.
Board, J. and Sutcliffe, C., 1996, “Trade Transparency and the London Stock Exchange,” European Financial Management, 2, 355-365.
Board, J. and Sutcliffe, C., 2000, “The Proof of the Pudding: the Effects of Increased Trade Transparency in the London Stock Exchange,” Journal of Business and Accounting, 27, 887-909.
Boehmer, E., Saar, G. and Yu, L., 2005, “Lifting the Veil: An Analysis of Pre-trade Transparency at the NYSE,” Journal of Finance, 60,783-815.
Brailsford, T. J., Frino, A., Hodgson, A. and West, A., 1999, “Stock Market Automation and the Transmission of Information between Spot and Futures Markets,” Journal of Multinational Financial Management, 9, 247-264.
Brockman, P. and Chung, D. Y., 1998, “Inter- and Intra-day Liquidity Patterns on the Stock Exchange of Hong Kong,” Journal of International Financial Markets, 8, 277-298.
Cao, C., Ghysels, E. and Hatheway, F., 2000, “Price Discovery without Trading: Evidence from the NASDAQ Preopening,” Journal of Finance, 55, 1339-1365.
Cao, C., Hansch, O. and Wang, X., 2009, “The Informational Content of an Open Limit Order Book,” Journal of Futures Markets, 29, 16-41.
Chen, C. H., Yu, W. C. and Zivot, E., 2009, “Prediction Stock Volatility After-Hours Information,” Working Paper, Available at SSRN http://ssrn.com/abstract=1324991.
Chen, T., Cai, J. and Ho, R.Y.K., 2009, “Intraday Information Efficiency on the Chinese Equity Market,” China Economic Review, 20, 527-541.
Christie, W. and Schultz, P., 1994, “Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?” Journal of Finance, 49, 1813-1840.
Chung, K. H. and Chuwonganant, C., 2009, “Transparency and Market Quality: Evidence from SuperMontage,” Journal of Financial Intermediation, 18, 93-111.
Chung, K. H. and Van Ness, R. A., 2001, “Order Handling Rules, Tick Size, and the Intraday Pattern of Bid-Ask Spreads for Nasdaq Stocks,” Journal of financial Markets, 4, 143-161.
Chung, K. H., Van Ness, B. F. and Van Ness, R.A., 1999, “Limit Orders and the Bid-Ask Spread,” Journal of Financial Economics, 53, 255-287.
Chung, K. H., and Zhao, X., 2003, “Intraday Variation in the Bid-Ask Spread: Evidence after the Market Reform,” Journal of Financial Research, 26, 191-206.
Comerton-Forde, Carole, Rydge, James and Burridge,Hayley, 2007, “Not All Call Auctions Are Created Equal: Evidence from Hong Kong,” Review of Quantitative Finance and Accounting, 29, 395-413.
Davies, R. J. 2003, “The Toronto Stock Exchange Preopening Session,” Journal of Financial Markets, 6, 491-516.
De Winne, R. and D'Hondt, C., 2005, “Market Transparency and Traders' Behavior: An Analysis on Euronext with Full Order Book Data,” Working Paper, Catholic University of Mons.
Ellis, K., Michaely, R. and O’Hara, M., 2000, “When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket,” Journal of Finance, 55, 1039-1074.
Fama, E. F. and MacBeth, J. D., 1973, “Risk, Return, and Equilibrium: Empirical Tests,” Journal of Political Economy, 81, 607-636.
Ferris, S. P., McInish, T. H. and Wood, R. A., 1997, “Automated Trade Execution and Trading Activity: The Case of the Vancouver Stock Exchange,” Journal of International Financial Markets, Institutions and Money, 7, 61-72.
Eom, K. S., Ok, J. and Park, J. H., 2007, “Pre-trade Transparency and Market Quality, Journal of Financial Markets, 10, 319-341.
Flood, M. D., Huisman, R. and Koedijk, K. G., and R. J. Mahieu, 1999, “Quote Disclosure and Price Discovery in Multi-Dealer Financial Markets,” Review of Financial Studies, 12, 37-59.
Gemmill, G., 1996, “Transparency and Liquidity: A Study of Block Transactions in the London Stock Exchange under Different Publication Rules,” Journal of Finance, 51, 1765-1790.
George, T. J., Kaul, G. and M. Nimalendran, 1991, “Estimation of the Bid-Ask Spread and Its Components: A New Approach,” Review of Financial Studies, 4, 623-656.
Glosten, L. and Harris, L., 1988, “Estimates of the Components of the Bid-Ask Spread,” Journal of Financial Economics, 21, 123-142.
Hansch, O., 2003, “Island Tides: Exploring ECN Liquidity,” Working Paper, Available at SSRN: http://ssrn.com/abstract=407705.
Harris, L. and Hasbrouck, J., 1996, “Market vs. Limit Orders: the SuperDot Evidence on Order Submission Strategy,” Journal of Financial and Quantitative Analysis, 31, 219-232.
Hasbrouck, J. and Schwartz, R. A., 1988, “Liquidity and execution costs in equity markets,” Journal of Portfolio Management, 14, 10-16.
Hasbrouck, J., 1991, “Measuring the Information Content of Stock Trades,” Journal of Finance, 46, 179-207.
Hauser, S., Shurki, I. and Kamara, A., 2009, “Market Design and the Efficiency of a Stock Market Under Liquidity Stress,” Working Paper, Available at SSRN: http://ssrn.com/abstract=1364451.
Hendershott, T. and Mendelson, H., 2000, ‘‘Crossing Networks and Dealer Markets: Competition and Performance,’’ Journal of Finance, 55, 2071–2115.
Hendershott, T. and Jones, C. M., 2005, “Island Goes Dark: Transparency, Fragmentation, and Regulation,” Review of Financial Studies, 18, 743-793.
Huang, R. D., 2002, “The Quality of ECN and Nasdaq Market Maker Quotes,” Journal of Finance, 57, 1285-1319.
Kalay, A., Sade, O. and Wohl, A., 2004, “Measuring Stock Illiquidity: An Investigation of the Demand and Supply Schedules at the Tel Aviv Stock Exchange,” Journal of Financial Economics, 74, 461-486.
Lee, C. M. C. and Ready, M. J, 1991, “Inferring Trade Direction from Intraday Data,” Journal of Finance, 42, 733-746.
Lyons, R. K., 1996, “Optimal Transparency in a Dealership Market with an Application to Foreign Exchange,” Journal of Financial Intermediation, 5, 225-254.
Madhavan, A., 1992, “Trading Mechanisms in Securities Markets,” Journal of Finance, 47, 607-642.
Madhavan, A., 1996, “Security Price and Market Transparency”, Journal of Financial Intermediation, 5, 255-283.
Madhavan, A. and Panchapageean, V., 2000, “Price Discovery in Auction Markets: A Look Inside the Black Box,” Review of Financial Studies, 13, 627-658.
Madhavan, A., Porter, D. and Weaver, D., 2005, “Should Securities Markets be Transparent?” Journal of Financial Markets, 8, 266-288.
Madhavan, A., Richardson M. and Roomans, M., 1997, “Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks,” Review of Financial Studies, 10, 1035-1064.
McInish, T. H., Van Ness, B.F. and Van Ness R. A., 1998, “The Effect of the SEC’s Order-handling Rules on Nasdaq,” Journal of Financial Research, 21, 3, 247-254.
McInish, T. H. and Wood, R. A., 1992, “An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks,” Journal of Finance, 47, 753-764.
Medrano, L. A. and Vives, X., 2001, “Strategic Behavior and Price Discovery,” Rand Journal of Economics, 32, 221-248.
O’Hara, M., 1995, Market Microstructure Theory, Basil Blackwell, Cambridge, Mass.
Pagano, M. and Röell, A., 1990,“Shifting Gears: An Economic Evaluation of the Reform of the Paris Bourse,” Working Paper No. 103, London Stock Exchange Financial Markets Group, London School of Economics, London.
Pagano, M. and Röell, A., 1996, “Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading,” Journal of Finance, 51, 579-611.
Peiers, B., 1997, “Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market,” Journal of Finance, 52, 1589-1614.
Porter, D. C. and Weaver, D. G., 1998, “Post-trade Transparency on Nasdaq’s National Market System,” Journal of Financial Economics, 50, 231-252.
Rules of the Hong Kong Exchange, http://www.hkex.com.hk/eng/rulesreg/traderules /exrule.htm
Schwartz, R .A. and Weber, B. W., 1997, “Next-generation Securities Market Systems: An Experimental Investigation of Quote-driven and Order-driven Trading,” Journal of Management Information Systems, 14, 57-79.
Silva, A. C. and Chavez, G., 2002, “Components of execution costs: evidence of asymmetric information at the Mexican Stock Exchange,” Journal of International Financial Markets, Institutions and Money, 12, 253-278.
Simaan, Y., Weaver, D. G. and Whitcomb, D.K., “Market Maker Quotation Behavior and Pretrade Transparency,” 2003, Journal of Finance, 58, 1247-1267.
Venkataraman, K., 2001, “Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchange,” Journal of Finance, 56, 1445-1485.
Vo, M. T., 2007, “Limit Orders and the Intraday Behavior of Market Liquidity: Evidence from the Toronto Stock Exchange, Global Finance Journal, 17, 379-396.
Weston, J. P., 2002, “Electronic Communication Networks and Liquidity on the Nasdaq,” Journal of Financial Service Research, 22, 125-139.
Zhao, X. and Chung, K. H., 2007, “Information Disclosure and Market Quality: The Effect of SEC Rule 605 on Trading Costs,” Journal of Financial and Quantitative Analysis, 42, 657-682.