Frederick H. deB. Harris

Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets

Using synchronous transactions data for IBM from the New York, Pacific, and Midwest Stock Exchanges, we estimate an error correction model to investigate whether each of the exchanges is contributing to price discovery. Johansens test yields two cointegrating vectors, which together verify the expected long-run equilibrium of equal prices across the three exchanges. Two error correction terms specified as the differences from IBM prices on the NYSE indicate that adjustments maintaining the long-run cointegration equilibrium take place on all three exchanges. That is, IBM prices on the NYSE adjust toward IBM prices on the Midwest and Pacific Exchanges, just as Midwest and Pacific prices adjust to the NYSE.

Security price adjustment across exchanges: an investigation of common factor components for Dow stocks

Abstract VECMs can detect trades that permanently move the markets in cross-listed stocks. We employ Gonzalo and Grangers (J. Business Econom. Stat. 13 (1995) 1) reduced-rank regressions and QGG test statistic to analyze the common factor weight attributable to three informationally-linked exchanges for DJIA stocks over 1988–1995. We distinguish this error correction approach to trading price adjustment from the information shares approach to quote price leadership. In 1988, a 72.2% mean common factor weight (fNYSE) approximated the NYSEs 86% share of the trades. However, by 1992 fNYSE had declined precipitously for 27 Dow stocks, averaging only 49.6%, despite an unchanged 86% share of the trades. By 1995, the NYSEs common factor weight had recovered, averaging 62.9% on 84% of the trades. We discuss three alternative microstructure-theoretic hypotheses that can confront this evidence.

A revenue management approach to demand management and order booking in assemble-to-order manufacturing

Abstract Revenue management is an order acceptance and refusal process that employs differential pricing strategies and stop sales tactics to reallocate capacity, enhance delivery reliability and speed, and realize revenue from change order responsiveness in order to maximize the revenue from pre-existing capacity. While previously considered primarily as a tool of service operations, revenue management has considerable potential for assemble to order (ATO) manufacturing environments. Increasing demand for customer responsiveness has created service-oriented manufacturing environments suitable for the application of revenue management methods. This paper applies revenue management concepts and techniques to ATO manufacturing environments and presents models for optimal pricing and capacity decisions.

An investigation of price discovery in informationally-linked markets: equity trading in Malaysia and Singapore

Abstract Using transactions data for the Kuala Lumpur Stock Exchange and the Stock Exchange of Singapore (SES) for a major Malaysian conglomerate, Sime Darby Berhad, and intraday exchange rate data, we investigate whether and to what extent each exchange contributes to price discovery. Results indicate that the price series are cointegrated. The raw data appear to indicate the presence of arbitrage opportunities, but none exist after taking exchange rate changes into account. Using the common long-memory factors of Gonzalo and Granger (1995, Journal of Business and Economic Statistics 13, 1–9), we show that while the majority of the price discovery (approximately 70%) occurs in the home country (Malaysia), the 26–32% of the price discovery attributable to the SES is statistically significant and exceeds Singapore’s share of the trading volume. Further, we find evidence of strong error correction of Singapore prices to Malaysian prices, but only weak error correction of Malaysian prices to Singapore prices.

Common factor components versus information shares: a reply ☆

Common factor components and information shares provide competing approaches to estimating the parameters of price discovery in cointegrated security markets or trading channels. Using simulated data on Hasbrouck’s (J. Financial Markets 5(3) (2002)) parameterized model of the stylized facts in satellite and centralized markets, we show that Gonzalo and Granger’s (J. Business Econom. Statist. 13 (1995) 1) procedure for estimating and testing common factor components recovers the true information structure in a wide range of financial market microstructure models. In addition, we investigate the role of stochastic process assumptions in estimating price discovery parameters by generalizing the sources of volatility in the implicit efficient price and the level of the signal to noise ratio. r 2002 Published by Elsevier Science B.V. JEL classification: G12

Evidence-based policy making for financial markets: a fairness and efficiency framework for assessing market quality

We propose an outcomes-based regulatory framework for assessing security market quality that includes measurement proxies for market integrity or fairness as well as market efficiency. Across 21 leading equity markets worldwide, a price impact metric of effective spreads minus realized spreads is 10-fold greater from the most to the least efficient market. Moreover, some metrics of market integrity exhibit an even wider range. The incidence of trading ahead of price-sensitive announcements varies from 0.02 to 0.44 of 1% of total turnover, and cumulative abnormal profit from such insider trading varies from as little as

Bids and Asks in Disequilibrium Market Microstructure: The Case of IBM

2,556 to

The Changing State of the NYSE Market: New Common Factors, Players, and Impulse Responses

21 million each security year.

Keynote paper: Large-scale entry deterrence of a low-cost competitor: an early success of airline revenue management

Microstructure research has recently forged two theoretical frameworks characterizing stock specialist behavior: a Walrasian inventory-theoretic individual optimization model sometimes with asymmetric information, and a queue-theoretic disequilibrium market model of the continuous auction process. To test the Brock and Kleidon (1992) continuous auction process, two simultaneous autoregressive equations for ask prices and for bid prices are estimated using transactions data for IBM for calendar year 1988. The results support Brock and Kleidons distinguishing implications--namely, increased trading volume raises the ask and lowers the bid, and a Hausman-type specification test fails to reject the exogeneity of order flows at the bid and the ask. Also, greater price volatility within a fifteen minute interval leads to both lower bids and lower asks as buyers are accorded a risk premium, consistent with Brown, Harlow and Tinics (1988) uncertain information hypothesis for efficient markets.

Share shift and airport substitution in origin-destination markets with low-cost entrants

This article investigates the impulse response path through which an information or liquidity shock reveals itself, first in depths and then in subsequent adjustments of the spread. Our three-equation error correction model investigates the equilibrium properties of spread and depth adjustment. In particular, they estimate orthogonalized impulse responses and Gonzalo-Granger common factor weights to discern whether spreads or depths are first to permanently impound the common stochastic trends in liquidity and information fundamentals. Using three years of NYSE quote data on the DJIA stocks, the authors show that depths decline in response to positive shocks to the spread but that this effect is not permanent. In contrast, spreads widen initially in response to positive depth shocks as orders “walk the book,s” but subsequent net tightening occurs within less than two minutes and proves to be a permanent effect. As order flow imbalance appears, the resulting quote changes quickly elicit undisplayed (off-market) liquidity. The authors conclude that the NYSE book refreshes very quickly.