We introduce a method of accurately and efficiently modeling a large population of participants in a financial market. Each participant is modeled as having an internal preference state affected by the continual arrival of exogenous information and by the behavior of others. In order to describe a community of traders, we introduce a population equation that is derived rigorously from the under...

I examine the informational contributions and effects on transitory volatility of trades initiated by different types of traders in three actively traded index futures markets. The results show that trades initiated by exchange member firms account for more than 60% of price discovery during the trading day. These institutional trades appear to be more informative than trades of individual exch...

The well-known approximation of the difference between the arithmetic average and geometric average returns as one-half of the variance of the underlying returns is reexamined using Jensen’s Inequality. The ”defect” in Jensen’s Indequality, is given an exlicit formula in terms of the variance following some ideas put forward by Holder. A new form of the AM-GM Inequality follows and is is applie...

We study asset-pricing implications of innovation in a general-equilibrium overlappinggenerations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. Due to the lack of inter-generational risk sharing, innovation creates a systematic risk factor, which we call “displacement r...

We show that tests for differences in trade execution costs using standard nearest neighbor matching estimation techniques typically have comparable empirical power but less bias than more “sophisticated” alternatives. However, estimation techniques that place more weight on distant firms (e.g. kernel-based matching) have better testing power and produce tighter confidence intervals when there ...

The consensus wisdom of active mutual fund managers, as reflected in their average overand underweighting decisions, contains valuable information about future stock returns. Analyzing a comprehensive sample of active U.S. equity funds 1984—2008, we find that stocks heavily overweighted by active funds outperform their underweighted counterparts by more than 7% per year, after adjustments for t...

Financial markets are a paradigmatic case of complex adaptive systems. However, their complexity cannot be captured by traditional modelisation paradigms and we thus need to turn to new modelling tools. We present agentbased simulation as the suitable paradigm to analyse financial markets: this method allows to study the market macro behaviour on the basis of its microstructure, and some advanc...

Tax-Loss Trading and Wash Sales An analysis of trades in the Finnish stock market around the turn of the year 1994-95, 199596, and 1996-97 shows that Finnish investors tend to realize losses more than gains towards the end of December. They also buy back the same stocks they recently sold, with a repurchase rate that depends on the size of the capital loss and how close the sale is to the end o...

In this paper a Bayesian approach to unit root testing for panel data models is proposed based on the comparison of stationary autoregressive models with and without individual deterministic trends, with their counterpart models with a unit autoregressive root. This is done under cross-sectional dependence among the units of the panel. Simulation experiments are conducted with the aim to assess...

This paper investigates the nature and behavior of the domestic (local) currency market that existed in Florence (Italy) during the late 14th and early 15th centuries (a.k.a. the Early Renaissance). We find that the extant volatility and microstructure models developed for modern asset markets are able to describe the statistical volatility properties observed for the denaro-florin exchange rat...