Market Microstructure and
Information Economics
Ph
D Course, Fall of 2002.
Updated
Sept. 26, 2002
Timing:
The
course is expected to be taught in September-October of 2002.
Course requirements:
·
The
required reading assignment for each session consists of one journal article.
Students are expected to have carefully read the article marked by a diamond (¨).
·
Each
student should present 3 articles and do 3 referee presentations (a critique of
an article presented by another student). The presentations should be deep
enough to give the audience the understanding of (a) what is research question?
(b) what is in the toolbox? (c)were the issues addressed? and (c) any tricks?
·
Prerequisites
are Finance I and Finance II.
·
In
order to obtain credit, you should do presentations/discussions (see above) and
either do a term paper or small empirical project.
·
I
hope that the project can lead to some research ideas that can be used in your
thesis.
·
Most
of the papers are available electronically either from HHS library web site or
from www.ssrn.com. If you cannot find some
paper, please let me know.
·
I
do not expect all the topics to be covered. However, the reading list will
provide you with some starting points in your future reading if you desire to do
it on your own.
·
I
am not covering behavioral finance issues. I expect that you are familiar with
them from Prof. De Bondt’ course.
¨
- Important paper (does not mean that the rest is not important!!!)
General references:
- ¨Madhavan,
A., “Market Microstructure: A Survey,” Journal
of Financial Markets, 3, August 2000, 205-258. – Latest review, a bit
short but surprisingly complete.
-
¨
Brunnenmeyer,
Markus, "Asset pricing under asymmetric information" Oxford U.
Press, 2001. - I think that this book is going to be the main textbook for
this course. However, it is purely theoretical and does not have any
institutional context.
- O’Hara,
Maureen, “Market Microstructure Theory,” Blackwell Business, 1995. –
The only decent book in market microstructure so far. Good for theory as of
95, short on empirical results.
- Grossman,
“The Informational Role of Prices,” MIT press 1989.
- Jarrow
et. al. Eds.,
Handbooks in OR & MS, Finance, Elsevier 1995. If you are planning to do
research in finance, it is a good idea to buy this book anyway. Terribly
expensive but worth the money.
Rational Expectations and
Learning
- Grossman,
S. “An Introduction to the
Theory of Rational Expectations under Asymmetric Information,” RES, 1981,
541-559
- Grossman,
S. “On the Efficiency of
Competitive Stock Markets Where Traders Have Diverse Information,” JF,
1976, 573-585.
- ¨Grossman
and Stiglitz: “On the Impossibility of Informationally Efficient
markets,” AER 70, 393-408.
- ¨Grossman
and Stiglitz: “Information and competitive price systems,” AER 66,
246-253.
- ¨Hellwig,
“On the Aggregation of Information in Competitive Markets,” JET 477-498
Dynamic Rational Expectation
Models I
- ¨Wang
and He, 1993 “Differential
information and dynamic behavior of stock trading volume”, RFS 919-972.
- ¨Wang
(1993), “A model of intertemporal asset prices under asymmetric
information,” RES, 249-282.
- Wang
(1994), “A Model of Competitive Trading Volume”, JPE,
127-168
4.
Hong and Wang (1995), “Trading and Returns Under Periodic Market
Closures,” mimeo, MIT.
- Zhou
(1998), “Dynamic portfolio choice and asset pricing with differential
information” 1028-1051.
- Zhou
(1999), “ Informational asymmetry and market imperfections: another
solution to the equity premium puzzle”, JFQA, 445-464.
- Naik
(1997), “On aggregation of information in competitive markets: the dynamic
case”, JEDC, 1199-1227.
- Brennan
and Xia (1998) “Stock price
volatility, learning and the equity premium”, Mimeo UCLA
- ¨Brennan
(1998) “ The role of learning
in dynamic portfolio decisions”, Mimeo, UCLA
- ¨Balduzzi
and Liu (2000) “Estimation risk, learning and international investment”,
Mimeo.
- Campbell
and Kyle (1993), “Smart money, noise trading and stock price behavior”
RES.
- Veronesi
(1999), “ Stock market overreaction to bad news in good times: a rational
expectations equilibrium model”, 875-1007.
- ¨Veronesi
(2000), “How does information quality affect stock returns?”, JF.
- Veronesi
and David (2000), “Option prices with uncertain fundamentals”, Mimeo.
- Yan
(2000), “Uncertain growth prospects, estimation risk and asset prices”,
Mimeo.
- Barberis,
(1999), “Investing for the
long run when returns are predictable”, Mimeo.
Models with Endogenous
Information Acquisition
- Diamond
and Verrecchia , “Information aggregation in a noisy rational expectations
economy,” JFE, 221-235.
- Verrecchia,
(1980), “Consensus beliefs
information acquisition and market information efficiency”, 874-883.
- Admati:
“A noisy rational expectations equilibrium for multi-asset securities
markets,” Econometrica, 629-657.
- ¨Admati
and Pfleiderer, (1986), “A monopolistic market for information”, JET,
400-438.
- ¨Admati
and Pfleiderer, (1987), “Viable allocations of information in financial
markets”, JET, 76-115.
- ¨Admati
and Pfleiderer, “Markets for
information”, JET, 96-103.
- ¨Admati
and Pfleiderer, (1990), “Direct and indirect sale of information”,
Econometrica, 901-928.
- Daniel,
Hirshleifer and Subrahmanyam, (1994), “Security analysis and trading
pattern when some investors receive information before others”, JF,
1665-1699.
- Hau,
(1998), “Competitive Entry and Endogenous Risk in the Foreign Exchange
Market”, RES, 11(4), 757-787
Inventory Models
- O’Hara:
Chapter 2.
- ¨Amihud,
Yakov and Haim Mendelson, “Dealership Market: Market Making with
Inventory”, Journal of Financial Economics, 8, 1980, 31-53.
- ¨Ho,
Thomas and Hans Stoll “The Dynamics of Dealer Markets Under
Competition,” Journal of Finance,
38, September 1983, 1053-1074.
- ¨Hagerty,
Kathleen “Equilibrium Bid-Ask Spreads in Markets with Multiple Assets,”
Review of Economic Studies, 58,
April 1991, 237-257.
- Spiegel,
Matthew “Stock Price Volatility in a Mulitple Security Overlapping
Generations Model,” Review of
Financial Studies, 11, 1998, 419-447.
- ¨Ho,
Thomas and Hans Stoll “Optimal Dealer Pricing Under Transactions and
Return Uncertainty,” Journal of
Financial Economics, 9, March 1981, 47-73.
- ¨Hansch,
Oliver, Narayan Naik, and S. Viswanathan, “Do Inventories Matter in
Dealership Markets? Some Evidence From the London Stock Exchange,” Journal
of Finance, 53(5), October 1998, pages 1623-56.
- Gehrig,
Thomas and Matthew Jackson “Bid-Ask Spreads with Indirect Competition
Among Specialists,” Journal of
Financial Markets, 1(1), April 1998, 89-120.
Kyle Model: Strategic
Traders, Noise, and Risk Neutral Specialists
- ¨Kyle,
Albert "Continuous Auctions and Insider Trading," Econometrica,
53, 1985, 1315-1335.
- Back,
Kerry, Henry Cao, and Greg Willard, "Imperfect Competition among
Informed Traders", Journal of
Finance, October 2000, v. 55, iss. 5, pp. 2117-55
- ¨Foster,
Douglas and S. Viswanathan "Strategic Trading When Agents Forecast the
Forecasts of Others," Journal of
Finance, 51(4), September 1996, 1437-78
- Spiegel,
Matthew and A. Subrahmanyam “Informed Speculation and Hedging in a
Noncompetitive Securities Market,” Reveiw
of Financial Studies, 5, 1992, 307-329.
- Chowdhry,
Bhagwan and Vikram Nanda "Multimarket Trading and Market
Liquidity," Review of Financial
Studies, 4, 1991, 483-511.
- ¨Foster,
Douglas and S. Viswanathan “A Theory of the Intraday Variations in Volume,
Variance, and Trading Costs in Securities Markets,” Review
of Financial Studies, 3(4), 1990, 593-624.
Social Welfare and Market
Performance with Insider Trading
- ¨Bhattacharya,
Utpal and Matthew Spiegel “Insiders, Outsiders, and Market Breakdowns,” Review
of Financial Studies, 4, 1991, 255-282.
- ¨Leland,
Hayne “Insider Trading Should it be Prohibited?,”Journal
of Political Economy, 100, August 1992, 859-887.
- Ausabel,
Larry “Insider Trading in a Rational Expectations Economy,” American
Economic Review, 80, 1990 1022-1041.
- ¨Glosten,
Larry “Insider Trading, Liquidity, and the Role of the Monopolist
Specialist,” Journal of Business,
62, April 1989, 211-235.
- Bhattacharay,
Utpal, Phil Reny, and Matthew Spiegel "Destructive Interference in an
Imperfectly Competitive Multi-Security Market," Journal
of Economic Theory, February 1995, 136-170.
- Khanna,
Naveen, Steve Slezak, and Michael Bradley “Insider Trading, Outside
Search, and Resource Allocation: Why Firms and Society May Disagree on
Insider Trading Restrictions,” Review
of Financial Studies, Fall 1994, 575-608.
- ¨DeMarzo,
Peter, Michael Fishman, and Kathleen Hagerty “The Optimal Enforcement of
Insider Trading Regulations," Journal
of Political Economy, 1998, 106, 602-632.
Bid-Ask Spread
- ¨Glosten,
Larry and Paul Milgrom “Bid, Ask, and Transaction Prices in a Specialist
Market with Heterogeneously Informed Traders,” Journal
of Financial Economics, 14, March 1985, 71-100.
- ¨Affleck-Graves,
John, Shantaram Hegde, and Robert Miller “Trading Mechanisms and the
Components of the Bid-Ask Spread,” Journal
of Finance, 49, September 1994, 1471-1488.
- ¨Georege,
Thomas, Gautam Kaul, and M. Nimalendran, “Estimation of the Bid-Ask Spread
and Its Components: A New Approach,” Review
of Financial Studies, 4(4), 1991, 623-56.
- George,
Thomas and Francis Longstaff “Bid-Ask Spreads and Trading Activity in the
S&P 100 Index Options Market,” Journal
of Financial and Quantitative Analysis, 28, September 1993, 381-397.
- Stoll,
Hans "Inferring the Components of the Bid Ask Spread: Theory and
Empirical Tests," Journal of
Finance, 44, 1989, 115-134.
- ¨Hasbrouck,
Joel "Measuring the Information Content of Stock Trades," Journal
of Finance, 46, 1991, 179-207.
- Ball,
Cliff and Tarun Chordia “True Spreads and Equilibrium Prices,” working
paper Vanderbilt University, 1999.
- ¨Huang,
R. and Hans Stoll “The Components of the Bid-ask Spread: A General
Approach,” Review of Financial
Studies, 10, 1997, 995-1034.
- Madhavan,
Ananth and Seymour Smidt "An Analysis of Changes in Specialist
Inventories and Quotations," Journal
of Finance, 48(5), December 1993, 1595-1628.
- Jegadeesh,
Narasimhan and Sheridan Titman “Short-Horizon Return Reversals and the
Bid-Ask Spread,” Journal of
Financial Intermediation, 4, April 1995, 116-133.
- Easley,
David and Maureen O'Hara “Price, Trade Size, and Information in Securities
Markets,” Journal of Financial
Economics, 19(1), 1987, 69-90.
- ¨Easley,
David and Maureen O'Hara “The Information Content of the Trading
Process,” Journal of Empirical
Finance, 4, June 1997, 159-186.
- Neal,
Robert and Simon Wheatley “Adverse Selection and Bid-Ask Spreads: Evidence
from Closed-End Funds,” Journal of
Financial Markets, 1(1), April 1998, 121-149.
Market Microstructure and
Asset Pricing
- ¨Brennan,
Michael and Avidar Subrahmanyam, “Market Microstructure and asset
pricing”, Journal of Financial Economics, 1996, 41, 441-464.
- ¨Easley,
David, Soeren Hvidkjaer and Maureen O’Hara, “In Information Risk a
Determinant of Asset Returns?” WP, 2000.
- Massa,
Massimo, and A. Simonov ”Information Uncertainty and Stock Returns”, WP,
2001.
Information Disclosure
- ¨Fishman,
Michael and Kathleen Hagerty “The Incentive to Sell Financial Market
Information,” Journal of Financial
Intermediation, 4, April 1995, 95-115.
- Fishman,
Michael and Kathleen Hagerty “The Mandatory Disclosure of Trades and
Market Liquidity,” Review of
Financial Studies, 8, 1995, 637-676.
- Easley,
David and Maureen O’Hara “Financial Analysis and Information Based
Trade,” Journal of Financial Markets,
1(2), August 1998, 175-202.
- ¨Admati,
A. and P. Pfleiderer “Forcing Firms to Talk: Financial Disclosure and
Externalities,” Review of Financial
Studies, 13, Fall 2000, 479-520.
Trading Mechanisms
- ¨Glosten,
Larry “Is the Electronic Open Limit Order Book Inevitable?,” Journal
of Finance, 49, September 1994, 1127-1161.
- ¨Madhavan,
A. and V. Panchapagesan “Price Discovery in Auction Markets: A Look Inside
the Black Box,” Review of Financial
Studies, 13, Fall 2000, 627-658.
- Pirrong,
C. “The Organization of Financial Exchange Markets: Theory and
Evidence,” Journal of Financial
Markets, 2, November 1999, 329-358.
- Chakravarty,
Sugato and Craig Holden “An Integrated Model of Market and Limit
Orders,” Journal of Financial
Intermediation, 4, 1995, 213-241.
- ¨Dow,
James and Gorton, Gary “Profitable Informed Trading in a Simple General
Equilibrium Model of Asset Pricing,” Journal
of Economic Theory, 67(2), December 1995, 327-69.
- ¨Ready,
M. “The Specialist’s Discretion: Stopped Orders and Price
Improvement,” Review of Financial
Studies, 12, Winter 1999, 1075-1112.
- ¨Sofianos,
G. and I. Werner “The Trades of NYSE Floor Brokers,” Journal
of Financial Markets, 3, May 2000, 139-176.
- Kirilenko,
A. “On the Endogeneity of Trading Arrangements,” Journal
of Financial Markets, 3, August 2000, 287-314.
Market Manipulation
- Cherian,
J. A. and R.A. Jarrow, "Market Manipulation", Chapter 20 of
Handbook of Operations Research and Management Science, vol. 9, Finance, R.
A. Jarrow, V. Maksimovic and V. T. Ziemba (editors), North- Holland, 1995.
- ¨Roland
Benabou and Guy Laroque, Using
Privileged Information to Manipulate Markets: Insiders, Gurus, and
Credibility, The Quarterly Journal of Economics, Vol. 107,
No. 3. (Aug., 1992), pp. 921-958.
- Praveen Kumar and Duane J. Seppi, Futures
Manipulation with "Cash Settlement", The Journal of
Finance, Vol. 47, No. 4. (Sep., 1992), pp. 1485-1502.
- Mark Bagnoli, Barton L. Lipman, Stock
Price Manipulation Through Takeover Bids, The RAND Journal of
Economics, Vol. 27, No. 1. (Spring, 1996), pp. 124-147.
- ¨Franklin
Allen and Douglas Gale, Stock-Price
Manipulation, The Review of Financial Studies, Vol. 5, No. 3.
(1992), pp. 503-529
-
Speculative
Bubbles
- Brunnenmeyer,
Markus, "Asset pricing under asymmetric information" Oxford U.
Press, 2001, Chapter 6.
- Jean Tirole, On
the Possibility of Speculation under Rational Expectations, Econometrica,
Vol. 50, No. 5. (Sep., 1982), pp. 1163-1182.
- ¨Franklin
Allen and Gary Gorton, Churning
Bubbles, The Review of Economic Studies, Vol. 60, No. 4.
(Oct., 1993), pp. 813-836.
- Allen, Morris and Postlewaite (1993) "Finite bubbles with Short Sales
Constraint and Asymmetric Information", JET 61, pp. 206-229.
- ¨Dilip
Abreu and Markus K.Brunnermeier, "Bubbles
and Crashes" Econometrica (forthcoming), WP
2001.
Herding
Behavior
- Brunnenmeyer,
Markus, "Asset pricing under asymmetric information" Oxford U.
Press, 2001, Chapter 5.
- ¨Abhijit
V. Banerjee, A
Simple Model of Herd Behavior, The Quarterly Journal of Economics,
Vol. 107, No. 3, Aug., 1992., pp. 797-817.
- ¨David
S. Scharfstein and Jeremy C. Stein, Herd
Behavior and Investment , The American Economic Review, Vol.
80, No. 3. (Jun., 1990), pp. 465-479.
- ¨Christopher
Avery and Peter Zemsky, Multidimensional
Uncertainty and Herd Behavior in Financial Markets, The American
Economic Review, Vol. 88, No. 4. (Sep., 1998), pp. 724-748.
- Jeremy Bulow and Paul Klemperer, Rational
Frenzies and Crashes, The Journal of Political Economy, Vol.
102, No. 1. (Feb., 1994), pp. 1-23.
- Sushil Bikhchandani, David Hirshleifer, Ivo Welch, A
Theory of Fads, Fashion, Custom, and Cultural Change as Informational
Cascades, The Journal of Political Economy, Vol. 100, No. 5.
(Oct., 1992), pp. 992-1026.
- Sushil Bikhchandani, David Hirshleifer, Ivo Welch. Informational
Cascades and Rational Herding:
An Annotated Bibliography and Resource Reference. It can be found on
Ivo Welch' web site.
-
Lectures 2002: Schedule
Day |
Date |
Time |
Event |
Room |
Mon |
September 2, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
September 4, 2002 |
15.15-17.00 |
Cancelled! |
342 |
Mon |
September 9, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
September 11, 2002 |
15.15-17.00 |
Lecture |
342 |
Mon |
September 16, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
September 18, 2002 |
15.15-17.00 |
Lecture |
342 |
Mon |
September 23, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
September 25, 2002 |
15.15-17.00 |
Lecture |
342 |
Mon |
September 30, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
October 2, 2002 |
15.15-17.00 |
Lecture |
342 |
Mon |
October 7, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
October 9, 2002 |
15.15-17.00 |
Lecture |
342 |
Mon |
October 14, 2002 |
17.15-19.00 |
Lecture |
350 |
Wed |
October 16, 2002 |
15.15-17.00 |
Lecture |
342 |
Room 342 and 350 is located on the 3th floor at the Stockholm School of
Economics, Sveavägen 65.
Course Director
Assistant Professor Andrei Simonov
Department of Finance, Stockholm School of Economics
Room 677, Tel: 736 9159, e-mail Andrei.Simonov@hhs.se
Course Secretary
Marita Rosing
Department of Finance, Stockholm School of Economics
Room 665, Tel: 736 9140, e-mail finmr@hhs.se