Santiago, Chile was subject to serious air quality problems in the late 1980s and early 1990s as a result of increased industrial and transportation emissions. In an effort to improve air quality, the government implemented a number of policies including an emission trading program to reduce and cap emissions of particulate matter smaller than 10 microns (PM10) from stationary sources. The emis...

We examine the competitive advantage enjoyed by dark venues over stock exchanges due to rules regulating the minimum price variation (MPV) for quoting equity securities. The MPV rule requires quotes above $1.00 per share to be in pennies, but it permits subpenny trades to facilitate price improvement for marketable orders. This exception to the penny quote rule benefits dark venues by allowing ...

The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of economic general equilibrium in the presence of transaction costs and market segmentation (in trading posts with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Scale economies in transaction cost account for...

Prior research demonstrates that investors respond differently to earnings surprises that are part of a string of consecutive earnings increases or surprises than to those that are not. To shed light on who values these patterns, I compare trading responses of small and large traders to earnings surprises that occur during a series of positive or negative surprises. I find that the relative int...

Algorithmic trading (AT) in asset markets has risen in importance over the past decade, revolutionizing the way market transactions are conducted. The extant empirical literature provides sometimes contradictory results on the impact of AT on market quality parameters such as liquidity and volatility. In this work we create a computer simulated asset market in order to make the effects of algor...

This paper provides empirical evidence on the relationship between trading volumes, volatility and bidask spreads in foreign exchange markets. It uses a new data set that includes daily data on trading volumes for the dollar exchange rates of seven currencies from emerging market countries. The sample period is 1 January 1998 to 30 June 1999. The results are broadly consistent with the findings...

In his seminal work, Constantinides (1986) finds that transaction cost has only a second order effect on liquidity premia. In this paper, we show that incorporating the well-established time-varying return dynamics across trading and nontrading periods can produce a first order effect that is much greater than that found by the existing literature and comparable to empirical evidence. Surprisin...

I formulate a stylized Glosten-Milgrom model of financial market trading in which people are allowed to time their trading decision. The focus of the analysis is to understand people’s timing behavior and how it affects bidand offer-prices and volume. Assuming heterogeneous quality of information, not all informed traders choose to trade immediately but some chose to delay, although they expect...

We analyze the relationship between new product introductions, trading activity, and systematic risk changes. The analysis is placed within a real options framework in which new product introductions are associated with the exercise of a real option. Using a unique hand-collected data set on new drug approvals, we find opposing results to previous work. Trading activities change after new produ...

In this paper, we develop an algorithm that optimizes logarithmic utility in pairs trading. We assume price processes for two assets, with transaction cost linear with respect to the rate of change in portfolio weights. We then solve the optimization problem via a linear programming approach to approximate dynamic programming. Our simulation results show that when asset price volatility and tra...