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We examine the informational roles of trades and time between trades in the domestic and overseas US Treasury markets. A vector autoregressive model is employed to assess the information content of trades and time duration between trades. We find significant impacts of trades and time duration between trades on price changes. Larger trade size induces greater price revision and return volatility, and higher trading intensity is associated with a greater price impact of trades, a faster price adjustment to new information and higher volatility. Higher informed trading and lower liquidity contribute to larger bid–ask spreads off the regular daytime trading period.

This chapter discusses the evolution of online trading, its application in various market structures, and its benefits and potential concerns. Computers were first used in electronic communication networks among brokers and dealers to make trades and for informational purposes. Online brokers became popular with retail investors as the internet spread. Online trading comes with various trading protocols and order types. It enables traders to automate trading decisions and process data more easily using charting tools and customized programs connected to the broker's infrastructure. Electronic trading allows for greater centralization but can also be accompanied by market fragmentation. Market regulation has affected market structure and is still evolving. Centralization allows for more competitive prices and reduces search costs. Decentralized markets could cope better with asymmetric information.

Using intraday prices for the S&P 500 and Nikkei Stock Average stock indexes and aggregate trading volume for the New York and Tokyo Stock Exchanges, we show how short-run comovements between national stock market returns vary over time in a way related to the trading volume and liquidity in those markets. We frame our analysis in the context of the heterogeneous-agent models of trading developed by Campbell, Grossman and Wang (1993) and Blume, Easley and O’Hara (1994) and Wang (1994) which predict that trading volume acts as a signal of the information content of a given price move. While we find that there exists significant short-run dependence in returns and volatility between Japan and the U.S., we offer new evidence that these return “spillovers” are sensitive to interactions with trading volume in those markets. The cross-market effects with volume are revealed in both close-to-open and open-to-close returns and often exhibit non-linear patterns that are not predicted by theory.

This paper adds to the scant literature on the tightening of regulations and its impact on the profitability of insider trades by examining the effects of the recent enactment of the Securities Market Amendment Act 2002 in New Zealand. We investigate the abnormal returns around the date of insider transactions both before and after the introduction of this Act. We find that the number of insider transactions decreased just prior to the introduction of the Act; further we observe a marked reduction in the profitability of directors. However, the difference between the pre and post-change returns lacks statistical significance.

This study explores the price linkage between the Chinese commodity futures market and other dominant futures markets, and examines the forces behind the price linkages. The contribution by the trading hour innovations in the United States (or United Kingdom) market to the overnight price changes in the Chinese market is larger in scale than the contribution by the daytime information from the Chinese market to the overnight returns of the corresponding US (or UK) market. Several futures have significant interactions of the domestic and foreign factors in the price linkages while the Chinese domestic factors explain better the global market price linkage in some futures (aluminum, gold, and corn), demonstrating the leading role of the Chinese futures markets in these world markets.

This chapter provides a theory model of trade finance to explain the “great trade collapse.” The model shows that, first, the riskiness of international transactions rises relative to domestic transactions during economic downturns; and second, the exclusive use of a letter of credit in international transactions exacerbates a collapse in trade during a financial crisis. The basic model considers banks’ optimal screening decisions in the presence of counterparty default risks. In equilibrium, banks will maintain a higher precision screening test for domestic firms and a lower precision screening test for foreign firms, which constitutes the main mechanism of the model.

This paper seeks to explain the serial persistence as well as the substantial number of zeros characterizing global bilateral investment holdings. We explore the different sources of serial persistence in the data (unobserved country pair effects, genuine state dependence, and transitory shocks) and examine the crucial factors affecting the decision to invest in a host country.

Based on a gravity setup, we consider investment behavior at the extensive (participation) margin and employ dynamic first-order Markov probit models, controlling for unobserved cross-sectional heterogeneity and serial correlation in the transitory error component, in order to explore the sources of persistence. Within this modeling framework we explore the importance of institutional quality of the host country in attracting foreign investment.

The data support that the strong persistence is driven by true state dependence, implying that past investment experiences strongly impact on the trajectory of future investment holdings. Institutional quality appears to play a significant role to attract foreign investment.

The empirical findings suggest that due to the existence of genuine state dependence, inward-investment stimulating policy measures could have a more pronounced effect since they are likely to induce a permanent change to the future trajectory of inward investment.

Both the substantial number of zeros and the salient persistence characterizing bilateral investment holdings decision have been previously overlooked in the literature. A study modeling jointly the levels and the selection mechanism could prove a fruitful direction for future research.

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the-market” doctrine] to prove classwide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes.

Market efficiency cannot be presumed without proof because even large publicly traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court.

Instead, to invoke fraud-on-the-market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news – a hallmark of a semi-strong form efficient market), have any merit. Even then, to claim classwide reliance, plaintiffs must prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do.

These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.

We utilize cross-sectional regression analysis to identify key variables affecting the initial three-year holding period returns of foreign equities traded as American Depository Receipts (ADRs) on the New York Stock Exchange (NYSE). Our results suggest that U.S. market index movements and foreign exchange rates are the main determinants of the initial three-year holding period returns for 285 ADRs listed from January 1990 through December 2002. The determinants vary once the sample is broken into subsets comparing ADRs issued before 1998 to those issued afterwards, ADRs issued as IPOs versus SEOs, and Asia Pacific ADRs versus European and Latin American ADRs. We also find that U.S. interest rate movements and type of ADR issue (IPO versus SEO) provide little explanatory power for ADR returns overall.

Financial technology (fintech) refers to using new technology to improve and automate the delivery and use of financial services. This chapter provides a brief introduction to fintech. It also includes the book's purpose, distinguishing features, intended audience, and structure. A synopsis of Chapters 2 through 23 is offered. The chapter concludes that fintech is constantly evolving and is reshaping finance. Fintechs offer a new paradigm of growth.