Joon Chae

An analysis of split orders in an index options market

This study presents the empirical evidence of Kyle (1985) that informed traders spread their orders over time to camouflage their information. Our proprietary data, which contain account numbers in the Korean options market, identify whether traders break up his or her order (split orders) or not. We show that split orders are associated with a larger proportion of cumulative price change than nonsplit orders are. Furthermore, nonsplit orders, even small- or medium-size ones, cause much smaller cumulative price changes. These results improve upon the tests of Barclay and Warner (1993).

Determinants of Trading Profits: The Liquidity Provision Decision

Theories show that liquidity provision implies negative contemporaneous correlation between trades and returns. Dealers on the Taiwan Stock Exchange are granted typical dealer trading advantages without obligations to provide liquidity and, thus, are ideal to test whether these advantages lead to voluntary liquidity provision (earning bid-ask spreads) or information trading (trading in the direction of the market). We find a strong positive correlation in aggregate, implying that these unrestricted dealers prefer information trading. We also find that smaller dealers are more likely to provide liquidity and that small-cap stocks (with larger bid-ask spreads) are more profitable for liquidity provision.

Does a Firm's Takeover Vulnerability Cause its Stock Price to Deviate from Random Walks?

This paper examines whether a firms takeover vulnerability increases the scope of speculative noise trading for its stock. Specifically, the paper tests whether takeover vulnerability overly motivates investors to acquire and trade on private information and thus causes them to react even to non-information as if it were information; if so, then the stock price changes will be serially correlated. Using variance ratio, we find that the hypothesized pattern is indeed borne out by data but it is conditional on the quality of information environment. That is, a stocks deviation from random walks is larger when its takeover vulnerability is greater and its information environment is poorer. In a sufficiently good information environment, on the other hand, there is no evidence that takeover vulnerability causes speculative noise trading. All those patterns are observed only in individual stock returns and not at the portfolio level. The no-result with portfolios implies that the deviation from random walks observed in individual stock returns is driven by a firm-specific component and thus not explained by time-varying expected returns.