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Ebook Investigation of Market Efficiency: An Event Study of Insider Trading in the Stock Exchange of Hong Kong

Submitted by puput on Wed, 05/05/2010 - 03:04

Most developed countries around the world have enacted laws prohibiting insiders from trading based on non-public information in order to establish a market environment where security trading is a fair game for all participants. However, the numerous empirical analyses that have focused on insider trading have consistently documented that portfolios which are constructed on the basis of the trading behavior of insiders generate abnormal profits. These abnormal profits, which are the result of insider’s prior access to knowledge about public information events, indicate the existence of an inefficient market.

In an efficient market all available information relevant to the pricing of securities must be rapidly reflected in the prices of the securities. The arguments of Fama (1965) form the theoretical foundation for the Efficient Market Hypothesis, which persuasively reasons that in an efficient and active market consisting of many well informed investors, equity prices will appropriately reflect the effects of information based on present and future expected events. The strong form of the hypothesis asserts that the current market prices fully reflect all private (insider) and public information. In other words, insiders should not be able to earn excess returns from privileged asymmetric information. The strong form of the hypothesis represents an absolute standard, and in practice, it is more likely that markets will exhibit only a certain degree of efficiency.

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PDF Ebook Lending To The Borrower From Hell: Debt And Default In The Age of Philip Ii, 1556–159

Submitted by antoq on Thu, 04/22/2010 - 06:23

Philip II of Spain accumulated debts equivalent to 60% of GDP. He also failed to honor them four times. We ask what allowed the sovereign to borrow much while defaulting often. Earlier work emphasized either banker irrationality or the importance of sanctions. Using new archival data, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip II’s access to smoothing services. Making loans in overlapping coalitions, the Genoese acted in unison in times of crisis. Lending moratoria were enforced through a “cheat the cheater” mechanism (Kletzer and Wright, 2000). Thus, market power and reputational concerns were sufficient to sustain lending under conditions of anarchy.

What sustains sovereign borrowing? One important school of thought argues that, in the absence of borrower commitment, punishment mechanisms outside the lending transaction itself are necessary to make governments pay.1 Other authors have emphasized the importance of reputation and the need for inter temporal smoothing.2 A recent literature focuses on the importance of coordination, incentive structures, and market power between lenders (Kletzer and Wright 2000; Wright 2002; Kovrijnykh and Szentes 2007).3 In this paper, we examine one of the most famous historical cases at the dawn of sovereign borrowing in an attempt to decide which mechanism was responsible for sustained lending.

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Ebook Search, Costly Price Adjustment and the Frequency of Price Changes – Theory and Evidence

Submitted by puput on Sat, 05/15/2010 - 04:26

The goal of the paper is to provide a better understanding of nominal rigidities by analyzing micro-level pricing decisions. We establish a new empirical finding that the intensity of consumer search for the best price affects the frequency of price adjustment: price changes are more frequent and smaller in markets in which search is more intense. The relationship we document is both statistically and economically significant. We analyze an equilibrium model that explains the relationship. In our model, which is related to Bénabou (1992), customers are heterogeneous and search for the best price. We define the propensity to search as the expected return to search for a given relative price dispersion in the market. Competing firms face costs to adjust nominal prices. We show that equilibrium pricing strategies are affected by market characteristics related to consumer search and that the model predicts the patterns observed in the data.

The empirical relationship we discover holds in two very different data sets. The first data set consists of store-level, actual transactions prices for 55 products and services in Poland, each observed monthly in up to 47 stores, over 1992-96. Following the classic Stigler (1961) paper, we proxy the propensity to search with the value of purchases, the good’s importance in household expenditure (conditional on the household buying the good) and the frequency of purchases. The second data set (Bils and Klenow (2004)), consists of prices collected by the Bureau of Labor Statistics in 1995-7; these prices cover 70% of US CPI. The data are grouped into 350 ELIs (Entry Level Items); for each ELI we have the average monthly probability of price changes in a given month. We proxy the propensity to search for goods grouped in a given ELI with its weight in CPI expenditure. Despite the very different environments (for example, the average CPI inflation is about 30% in Poland and is below 3% in the US), we find strong support for the predictions of the model in both data sets.

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