Michael A. Goldstein

Computerized and High-Frequency Trading

The use of computers to execute trades, often with very low latency, has increased over time, resulting in a variety of computer algorithms executing electronically targeted trading strategies at high speed. We describe the evolution of increasingly fast automated trading over the past decade and some key features of its associated practices, strategies, and apparent profitability. We also survey and contrast several studies on the impacts of such high-speed trading on the performance of securities markets. Finally, we examine some of the regulatory questions surrounding the need, if any, for safeguards over the fairness and risks of high-speed, computerized trading.

Real Estate Investment Trusts, Small Stocks, and Bid-Ask Spreads

This study examines the liquidity of Real Estate Investment Trusts (REITs), as measured by their bid-ask spread. We find that REIT spreads have increased over the period 1986-1990, are inversely related to market capitalization, and are similar in magnitude to spreads on other stocks of comparable size. Analysis of variance tests indicate that REIT spreads are similar across equity, mortgage and hybrid asset types. Multivariate regression results indicate that market capitalization is the primary determinant of REIT bid-ask spreads, and spreads are larger for National Association of Securities Dealers Automated Quotations (NASDAQ) REITs than for New York Stock Exchange (NYSE) REITs. The regression results also indicate that spreads are lower for equity REITs than for mortgage or hybrid REITs, and are inversely related to the fraction of the REITs shares held by institutional investors. The similarity between REIT spreads and those of other common stocks holds in both bull and bear real estate markets and suggests that, from a liquidity perspective, REITs are similar to other common stocks. Copyright American Real Estate and Urban Economics Association.

Water and life from snow: A trillion dollar science question

Snow provides essential resources/services in the form of water for human use, and climate regulation in the form of enhanced cooling of the Earth. In addition, it supports a thriving winter outdoor recreation industry. To date, the financial evaluation of the importance of snow is incomplete and hence the need for accelerated snow research is not as clear as it could be. With snow cover changing worldwide in several worrisome ways, there is pressing need to determine global, regional, and local rates of snow cover change, and to link these to financial analyses that allow for rational decision making, as risks related to those decisions involve trillions of dollars.

Privatization success and failure: finance theory and regulation in the transitional economies of Albania and the Czech Republic

This paper examines the transition of economies of Albania and the Czech Republic, noting that their relative failure and success could have been predicted by academic literature. Financial intermediation theory predicted the rise of independently created mutual funds in the Czech Republic, while similar intermediation literature related to monitoring (or the lack thereof) predicted the development of the Ponzi schemes of Albania. These privatization success and failure stories highlight the primary importance of regulation, monitoring and enforcement in economies-in-transition. Lessons learned from privatization in developed countries may therefore not be directly applicable to newly emerging economies, as economies-in-transition do not have the regulatory and legal network in place to prohibit malfeasance.

Using an option pricing approach to evaluate strategic decisions in a rapidly changing climate: Black–Scholes and climate change

Nature provides critical ecosystem services on which society and businesses rely, but the effort and cost of utilizing those services can change with the climate. Both climatic trend and variance affect these efforts and costs, creating a complex decision space where uncertain future predictions are the rule. Here, we show how these problems mimic option payoffs and demonstrate a modified version of the Black–Scholes option pricing formula (widely used in finance) to analyze these types of business-climate decisions. We demonstrate the method by (1) examining the viability of building ice roads in the Northwest Territories of Canada, where a strong negative warming trend is underway, and (2) applying it to the problem of the ongoing California drought, estimating expected water costs with and without storage. The method is novel and provides a simple and accessible way to make such assessments to at least a first-order approximation. While our focus here is on business situations where decisions are usually based on money, we suggest that a similar approach could be used beyond the business world in examining risk and attributing that risk to climate variance vs. trend.

The Global Preference for Dividends in Declining Markets

Investors globally prefer dividend-paying stocks over nondividend-paying stocks more in declining than in advancing markets, even accounting for firm-level growth opportunities, size and risk effects. Dividend-paying stocks outperform nondividend-paying stocks, from 0.63% (China) to 3.79% (Canada) more per month in declining than in advancing markets. In declining markets, dividend-paying firms outperform by more than any underperformance in advancing markets. The results are robust across dividend taxation regimes, legal environments, emerging and developed markets, periods prior to and after the 2008 global financial crisis, the exclusion of the dividend declaration month and in respect to segmented or integrated international capital markets.

Providing Liquidity in an Illiquid Market: Dealer Behavior in U.S. Corporate Bonds

We examine market making behavior of dealers for 55,988 corporate bonds, many of which trade infrequently. Dealers have a substantially higher propensity to offset trades within the same day rather than committing capital for longer periods for riskier and less actively traded bonds. Dealers’ holding periods do not decline with a bond’s prior trading activity, and in fact are lowest for some of the least active bonds. As a result, cross sectional estimates of roundtrip trading costs do not increase as prior trading activity declines. Our results suggest that dealers endogenously adjust their behavior to mitigate inventory risk from trading in illiquid and higher risk securities, balancing search and inventory costs in equilibrium such that observed spreads can appear invariant to expected liquidity.

Pricing the urban cooling benefits of solar panel deployment in Sydney, Australia

Cities import energy, which in combination with their typically high solar absorption and low moisture availability generates the urban heat island effect (UHI). The UHI, combined with human-induced warming, makes our densely populated cities particularly vulnerable to climate change. We examine the utility of solar photovoltaic (PV) system deployment on urban rooftops to reduce the UHI, and we price one potential value of this impact. The installation of PV systems over Sydney, Australia reduces summer maximum temperatures by up to 1 °C because the need to import energy is offset by local generation. This offset has a direct environmental benefit, cooling local maximum temperatures, but also a direct economic value in the energy generated. The indirect benefit associated with the temperature changes is between net AUD

The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets

230,000 and

Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the Nyse

3,380,000 depending on the intensity of PV systems deployment. Therefore, even very large PV installations will not offset global warming, but could generate enough energy to negate the need to import energy, and thereby reduce air temperatures. The energy produced, and the benefits of cooling beyond local PV installation sites, would reduce the vulnerability of urban populations and infrastructure to temperature extremes.