Asani Sarkar

Diversification Benefits of Emerging Markets Subject to Portfolio Constraints

This paper examines the international diversification benefits subject to portfolio constraints --- in particular, constraints on short selling. We show that the international diversification benefits remain substantial for U.S. equity investors when they are prohibited from short selling in emerging markets. This result is robust to investment restrictions on non-native individuals. It is also unaffected by the fact that the U.S. equity index portfolio is not on the efficient frontier spanned by U.S. securities. The integration of world equity markets reduces, but does not eliminate, the diversification benefits of investing in emerging markets subject to short-sale constraints.

Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares

Abstract In contrast to most other countries, Chinese foreign class B shares trade at an average discount of about 60% to the prices at which domestic A shares trade. We argue that one reason for the large price discount of B shares is because foreign investors have less information on Chinese stocks than domestic investors. We develop a model, incorporating both information asymmetry and market segmentation, and derive a relative pricing equation for A shares and B shares. We show theoretically that an A share index security, tradable by foreigners, increases the liquidity of B shares. Our empirical study of Chinese stocks supports the predictions of our model. Specifically, we show that our model-based proxies for information asymmetry explain a significant portion of the cross-sectional variation of the B share discounts.

Liquidity in U.S. Fixed Income Markets: A Comparison of the Bid-Ask Spread in Corporate, Government and Municipal Bond Markets

We examine the determinants of the realized bid-ask spread in the U.S. corporate, municipal and government bond markets for the years 1995 to 1997, based on newly available transactions data. Overall, we find that liquidity is an important determinant of the realized bid-ask spread in all three markets. Specifically, in all markets, the realized bid-ask spread decreases in the trading volume. Additionally, risk factors are important in the corporate and municipal markets. In these markets, the bid-ask spread increases in the remaining-time-to maturity of a bond. The corporate bond spread also increases in credit risk and the age of a bond. The municipal bond spread increases in the after-tax bond yield. Controlling for others factors, the municipal bond spread is higher than the government bond spread by about 9 cents per

Trading Costs in Three U.S. Bond Markets

100 par value, but the corporate bond spread is not. Consistent with improved pricing transparency, the bid-ask spread in the corporate and municipal bond markets is lower in 1997 by about 7 to 11 cents per

Capital constraints, counterparty risk, and deviations from covered interest rate parity

100 par value, relative to the earlier years. Finally, the ten largest corporate bond dealers earn 15 cents per

An analysis of CDS transactions: implications for public reporting

100 par value higher than the remaining dealers, after controlling for differences in the characteristics of bonds traded by each group. We find no such differences for the government and municipal bond dealers.

Liquidity Dynamics and Cross-Autocorrelations

Newly available transaction data are available for comparison of trading costs in the U.S. Treasury bond market with U.S. corporate and municipal bond markets. The mean bid-ask spread per

Market Sidedness: Insights into Motives for Trade Initiation

100 par value is estimated at 23 cents for municipal bonds, 21 cents for corporate bonds, and 8 cents for Treasury bonds. Maturity, trade size, and credit ratings are key determinants of the bid-ask spread. After controlling for credit risk, the bid-ask spread is not statistically different between corporate and Treasury markets but it is higher for municipal bonds relative to Treasuries.

Financial Amplification Mechanisms and the Federal Reserve's Supply of Liquidity During the Crisis

We provide robust evidence of a deviation in the covered interest rate parity (CIP) relation since the onset of the financial crisis in August 2007. The CIP deviation exists with respect to several different dollar-denominated interest rates and exchange rate pairings of the dollar vis-a-vis other currencies. The results show that our proxies for margin conditions and for the cost of capital are significant determinants of the CIP deviations, especially during the crisis period. The supply of dollars by the Federal Reserve to foreign central banks via reciprocal currency arrangements (swap lines) reduced CIP deviations at this time. Following the bankruptcy of Lehman Brothers, uncertainty about counterparty risk became a significant determinant of CIP deviations, and the swap lines program no longer affected the CIP deviations significantly. These results indicate a breakdown of arbitrage transactions in the international capital markets that owes partly to lack of capital and partly to heightened counterparty credit risk. Central bank interventions helped reduce the funding liquidity risk of global institutions.

A model of broker's trading, with applications to order flow internalization

Ongoing regulatory reform efforts aim to make the over-the-counter derivatives market more transparent by introducing public reporting of transaction-level information, including price and volume of trades. However, to date there has been a scarcity of data on the structure of trading in this market. This paper analyzes three months of global credit default swap (CDS) transactions and presents findings on the market composition, trading dynamics, and level of standardization. We find that trading activity in the CDS market is relatively low, with a majority of reference entities for single-name CDS trading less than once a day. We also find that a high proportion of CDS transactions conform to standardized contractual and trading conventions. Examining the dealer’s role as market maker, we find that large trades with customers are generally not rapidly offset by further trades in the same reference entity, suggesting that hedging of large positions, if taking place, occurs over a longer time horizon. Through our analysis, we provide a framework for regulators and policymakers to consider the design of the public reporting regime and the necessary improvements to data collection to facilitate meaningful price reporting for credit derivatives.