Adverse Selection, Liquidity Shock and Market Participation in Dual Financial Markets

2012 ◽  
Author(s):  
Feng Dong
Keyword(s):  
Financial Markets ◽  
Adverse Selection ◽  
Market Participation ◽  
Liquidity Shock

scholarly journals Is Trading Fast Dangerous?

2018 ◽  
pp. 9-27 ◽  
Author(s):  
Thierry Foucault ◽  
Sophie Moinas
Keyword(s):  
Financial Markets ◽  
Adverse Selection ◽  
Policy Making ◽  
Information Technologies ◽  
Empirical Literature ◽  
Market Quality ◽  
Gains From Trade ◽  
Adverse Selection Costs

This chapter discusses the findings of the growing theoretical and empirical literature on trading speed in financial markets. The speed of trading has increased significantly in recent years, due to progress in information technologies and automation of the trading process. This evolution raises many questions about the effects of trading speed. It is argued that an increase in trading speed raises adverse selection costs but increases competition among liquidity providers and the rate at which gains from trade are realized. Thus, the effect of an increase in trading speed on market quality and welfare is inherently ambiguous. This observation is important for assessing empirical findings regarding the effects of trading speed and policy-making.

scholarly journals The wisdom of the crowd in dynamic economies

2020 ◽  
Vol 15 (4) ◽  
pp. 1627-1668
Author(s):  
Pietro Dindo ◽  
Filippo Massari
Keyword(s):  
Financial Markets ◽  
Market Participation ◽  
Market Selection ◽  
Equilibrium Prices ◽  
Dynamic Economies ◽  
Points Of View

The wisdom of the crowd applied to financial markets asserts that prices represent a consensus belief that is more accurate than individual beliefs. However, a market selection argument implies that prices eventually reflect only the beliefs of the most accurate agent. In this paper, we show how to reconcile these alternative points of view. In markets in which agents naively learn from equilibrium prices, a dynamic wisdom of the crowd holds. Market participation increases agents' accuracy, and equilibrium prices are more accurate than the most accurate agent.

scholarly journals The Insurance Value of Trade Credit

2019 ◽  
Vol 11 (7) ◽  
pp. 87
Author(s):  
Mario Eboli ◽  
Andrea Toto
Keyword(s):  
Financial Markets ◽  
Financial Constraints ◽  
Trade Credit ◽  
Credit Rationing ◽  
Financial Policy ◽  
Positive Probability ◽  
Optimal Amount ◽  
Liquidity Constraint ◽  
Manufacturing Sectors ◽  
Liquidity Shock

The extensive use of trade credit in all manufacturing sectors, despite its high cost, is an apparent puzzle that economists explain in terms of asymmetric information problems affecting financial markets. The financial constraints arising from credit rationing and limited access to stock markets suffice to induce firms to resort to trade credit as a supplemental source of funding. Nonetheless, empirical evidence shows that also large and liquid firms facing no binding financial constraints use substantial amounts of trade credit. We address this issue by modelling the financial policy of a firm that does not face a binding liquidity constraint but the risk of being constrained in the future. We characterise the optimal amount of trade credit held by such a firm, and we show that a positive probability of facing a liquidity constraint leads the firm to fund its inventories with trade credit, even if cheaper sources of funds are available. The rationale is that trade credit provides implicit coverage against liquidity risk. Therefore, the optimal amount of trade credit grows with the expected size of a possible liquidity shock and with the likelihood of its occurrence.

Trust, financial literacy, and financial market participation

2021 ◽  
pp. 1-31
Author(s):  
Jill E. Fisch ◽  
Jason S. Seligman
Keyword(s):  
Financial Markets ◽  
Financial Market ◽  
Financial Literacy ◽  
Well Being ◽  
Retirement Savings ◽  
Willingness To Participate ◽  
Market Participation ◽  
Key Factors ◽  
Financial Market Participation ◽  
The Relationship

Abstract Willingness to participate in financial markets is important for financial well-being, including the accumulation of retirement savings through self-directed pension programs. We consider the roles of two key factors, trust and financial literacy in financial market participation. We find both are strongly related to participation. Although trust is more uniformly correlated with increases in financial market participation, the relationship between financial literacy and engagement is u-shaped, with increases in financial literacy first associated with reductions and subsequently with increases in the levels of participation. Our findings suggest trust and financial literacy play different roles and that each is related to investment behaviors in important ways.

Cheap Talk, Fraud, and Adverse Selection in Financial Markets: Some Experimental Evidence

1999 ◽  
Vol 12 (3) ◽  
pp. 481-518 ◽  
Author(s):  
Robert Forsythe ◽  
Russell Lundholm ◽  
Thomas Rietz
Keyword(s):  
Financial Markets ◽  
Experimental Evidence ◽  
Adverse Selection ◽  
Cheap Talk

Unobservable Risk Preferences and Value of Information in Financial Markets with Adverse Selection

1996 ◽  
Vol 11 (2) ◽  
pp. 197-222 ◽  
Author(s):  
Bharat Sarath ◽  
Ramachandran Natarajan
Keyword(s):  
Financial Markets ◽  
Adverse Selection ◽  
Value Of Information ◽  
Risk Preferences ◽  
Cash Flows ◽  
Risk Characteristics ◽  
Public Signal ◽  
Empirical Implications ◽  
Separating Equilibrium ◽  
Informational Value

We demonstrate the existence of a partially separating equilibrium based on the level of equity retention when a project of unknown value is taken public by an entrepreneur whose risk preferences are unobservable. We show that any such equilibrium results in some (endogenous) strictly positive level of equity retention. The value of a second public signal corresponding to audited reports required under the 1933 Securities Act is also analyzed. We show that this second signal derives informational value from the presence of unobservable risk preferences even though it only concerns cash flows and is completely independent of risk characteristics. The paper concludes with some empirical implications.

Leverage Cycles and the Anxious Economy

2008 ◽  
Vol 98 (4) ◽  
pp. 1211-1244 ◽  
Author(s):  
Ana Fostel ◽  
John Geanakoplos
Keyword(s):  
Emerging Markets ◽  
Financial Markets ◽  
Adverse Selection ◽  
Incomplete Markets ◽  
Emerging Economies ◽  
Analytical Framework ◽  
High Yield ◽  
Yield Data ◽  
Pricing Theory ◽  
Asset Classes

We provide a pricing theory for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. We show how leverage cycles can cause contagion, flight to collateral, and issuance rationing in a frequently recurring phase we call the anxious economy. Our model provides an explanation for the volatile access of emerging economies to international financial markets, and for three stylized facts we identify in emerging markets and high yield data since the late 1990s. Our analytical framework is a general equilibrium model with heterogeneous agents, incomplete markets, and endogenous collateral, plus an extension encompassing adverse selection. (JEL D53, G12, G14, G15)

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