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The purpose of this paper is to test and model non-linearities in block price deviations when they are executed outside the bid-ask quotes. The author conducts an empirical analysis on 662,312 transactions that were traded outside the bid-ask quotes in 2014 on the London Stock Exchange.

The tests reject the linearity hypothesis and the paper shows that the exponential smooth transition autoregressive model is capable of capturing the non-linear behaviour of block price misalignments.

The findings imply that when the deviation of block prices from their quoted value is small (large), trading will occur slowly (rapidly) to restore equilibrium, suggesting that trading costs eliminate continuous trading and that the block trade market is efficient.

The purpose of this paper is to re-model block price deviations from the bid-ask quotes. The major contribution is that the paper presents new empirical evidence, which explicitly allows for the possibility that block price misalignments from the bid-ask quotes can be characterized by a non-linear mean reverting process. The author demonstrates that the presence of transaction costs induces non-linear adjustments of block trade prices.

The purpose of this paper is to investigate how quotes originating via electronic communication networks (ECN)s affect trading costs.

In order to investigate the relations between trading costs and quotation venue, the bid‐ask spread is decomposed into its theoretical cost components associated with adverse selection, inventory handling, and order processing.

Stoll's adverse selection costs of ECN‐originated quotes relate positively to effective spreads, while Lin et al.'s adverse selection costs relate negatively to effective spreads.

The paper shows how trading costs relate to trading venue choice by decomposing the bid‐ask spread.

This chapter investigates the determinants of the volatility of spread in the over-the-counter foreign exchange market and examines whether the relationships differ in the crisis periods. We compute the measures for the volatility of liquidity by using bid-ask spread data sampled at a high frequency of five minutes. By examining 11 currencies over a 13-year sample period, we utilize a balanced dynamic panel regression to investigate whether the risk associated with the currencies quoted or trading activity affects the variability of liquidity provision in the FX market and examine whether the crisis periods have any effect. We find that both the level of spread and volatility of spread increases during the crisis periods for the currencies of emerging countries. In addition, we find increases in risks associated with the currencies proxied by realized volatility during the crisis periods. We also show risks associated with the currency are the major determinants of the variability of liquidity and that these relationships strengthen during periods of uncertainty. First, we develop measures to capture the variability of liquidity. Our measures to capture the variability of liquidity are non-parametric and model-free variable. Second, we contribute to the debate of whether variability of liquidity is adverse to market participants by examining what drives the variability of liquidity. Finally, we analyze seven crisis periods, allowing us to document the effect of the crises on determinants of variability of liquidity over time.

We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary market because the advent of public trading conveys hitherto private information and thereby mitigates adverse selection. The going‐public firm underprices the new issue to compensate uninformed subscribers for this added secondary market adverse selection risk. We test this market liquidity‐based explanation by investigating the ex‐post consequences of ownership structure choice on the initial pricing and the secondary market liquidity of a sample of initial public offerings on the New York Stock Exchange (NYSE). Consistent with our argument, we find that initial underpricing varies directly with the ex post trading costs in the secondary market. Further, initial underpricing is related positively to the concentration of institutional shareholdings and negatively to the proportional equity ownership retained by the founding shareholders. Finally, the secondary market illiquidity of new issues is positively related to institutional ownership concentration and negatively to ownership retention and underwriter reputation. Thus, the evidence based on our NYSE sample supports the view that the entrepreneurs' choice of ownership structure affects both the initial pricing and the subsequent market liquidity of new issues.

The study tests the hypothesis that following the arrival of news in the forex market, the trader/dealers demonstrate two kinds of biases which makes markets volatile: “Recurrence bias,” the belief that news which formerly led to volatility, will again generate volatility (i.e. volatility is recurring), and “Volatility Perception Bias,” the belief that increased volatility following the arrival of a news would persist.

The author uses a preliminary survey and three simulated trading game experiments involving professional foreign exchange dealers to understand these heuristic-led biases and the biases' impact on market volatility.

The paper finds evidence supporting the presence of both “Recurrence Bias” and “Volatility Perception Bias” and a statistically significant, positive impact of participant biases' on market heterogeneity.

The paper makes two important contributions: first, the use of simulated trading game experiment involving professional dealers and second, the incorporation of dealers' biases and heuristics in understanding forex volatility.

The purpose of this study is to systematically review and analyze the literature in the area of liquidity of financial markets. The study summarizes the key findings and approaches and highlights the research gaps in the extant literature.

A variety of reputed databases are utilized to select 100 research papers, from a large pool of nearly 3,000 research papers spanning between 1972 and 2018 using systematic literature review methodology. The selected research papers are organized to provide an in-depth analysis and an account of the ongoing research in the area of liquidity. The study uses bibliometric network visualization and word-cloud analyses to compile and analyze the literature.

The study summarizes the recent approaches in the liquidity research on aspects such as methodologies followed, variables applied, sub-areas covered, and the types of economies and markets covered. The article shows that the literature on liquidity in the emerging markets (e.g. China and India) is deficient. Overall, the following research areas related to liquidity need further exploration in the context of emerging markets: liquidity beyond the best bid-ask quotes, intraday return predictability using microstructure variables (e.g. order imbalances), impact of algorithmic-trading and volatility of liquidity.

To the best of authors’ knowledge, in the recent past, a detailed account of the literature on liquidity has not been published. It provides a comprehensive collection and classification of the literature on the liquidity of financial markets. This would be helpful to the future researchers, academics and practitioners in the area of financial markets.

This study investigates the impact of the enhanced continuous disclosure regime introduced in December 2002 on several measures of information risk in NZX‐listed stocks. We employ two microstructure models and an intraday data set to measure information risk in a sample of 71 stocks. Our empirical results show that the reforms enacted in December 2002 had no significant effect on either the level of information‐based trading or the adverse selection component of market spreads in our sample of NZX‐listed stocks.

The purpose of this study is to examine the impact of a recent innovation in the uranium market, the Global X Uranium Exchange-Traded Fund (URA), on the trading characteristics of constituent and non-constituent stocks.

The authors analyse bid-ask spread measures, relative effective spreads and adverse selection costs to assess changes in information asymmetry among uranium stocks. The authors also study abnormal returns to assess the impact of URA on the market.

Over a three-month period, following the introduction of URA, the authors find uranium stocks display decreased bid-ask spread measures, driven by reductions in information asymmetry. Relative effective spreads decrease by 36% after the introduction of URA, and adverse selection costs decline by 24% over the same period. Uranium stocks experience a significant positive abnormal return of 5.0% the day after the introduction of URA with subsequent price reversals. These suggest that the introduction of URA prompted uninformed traders to rebalance portfolios and migrate to the less information-sensitive Exchange-Traded Fund (ETF), causing temporary deviations in trading characteristics.

The authors demonstrate that the introduction of new financial securities to the market can have a significant impact on the trading characteristics of related equities. As URA is the only ETF in the uranium sector, the authors thereby avoid the influence of multiple ETFs that may have impacted previous studies.

Using S&P 500 additions, the purpose of this paper is to test the permanence of abnormal returns around the index inclusion announcement and effective implementation dates to differentiate among competing explanations for the index inclusion premia puzzle.

The event study methodology is used to examine abnormal returns and volume effects around the announcement dates (ADs) and implementation dates of index additions.

This study documents a twofold increase in trading volume and significant permanent abnormal returns at the ADs that are correlated with subsequent decreases in bid‐ask spreads. There is a fivefold increase in trading volume, but only temporary abnormal returns, around the effective dates (EDs). Taken collectively, the evidence indicates that the permanent return at announcement is best explained by liquidity/information cost explanation, but the temporary return and large trading increases at the ED can best be attributed to the price pressure hypothesis.

These results do not support the well documented long‐run downward‐sloping demand curve as the primary explanation for the abnormal returns observed on these dates.

This study contributes to the body of literature on the index inclusion effect by providing supporting evidence for the liquidity/information cost explanation, and by extending the previously analyzed index additions with an additional five‐year period from 2000‐2004.

The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms.

The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis.

Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement.

The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information.

This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.