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3rd Oxford Financial Research Summer Symposium


8-17 June 2004


Supported by Credit Suisse First Boston (CSFB)


The third Oxford Finance Summer Symposium took place in June of this year at the Saïd Business School in Oxford.  There were more than 50 people who participated in the ten-day event.  The Symposium is generously supported by Credit Suisse First Boston (CSFB).


The Symposium is organized around two workshops/ seminars in the morning and afternoon leaving the rest of the time free for participants to pursue their own and collaborative research projects.  There are two major public lecture series that are timed to coincide with the Symposium.  The first is the Deutsche Bank Lecture in European Financial Integration given by the visiting Deutsche Bank professor.  The second is the Clarendon Lectures in Finance, which are sponsored by Oxford University Press and subsequently published by the Press. 


The first workshop presentation was given by Christine Parlour (Carnegie Mellon University) in a paper entitled “Information Acquisition in a Limit Order Market”, joint with Ronald Goettler and Uday Rajan.  The question that the paper addresses is how valuable is information in financial markets.  Information can be detrimental in destroying the potential for risk sharing as well as assisting in the pricing of securities.  This paper is concerned with the incentives for participants in financial markets to acquire information.  It examines the value of acquiring information in the context of a market-making model in which uninformed traders primarily submit market orders and informed traders submit limit orders.  The paper shows that there can be excessive information gathering in the sense that there is an equilibrium in which all agents are informed but they would be better off if they were not.  The reason for this is that uninformed investors face an adverse selection problem, a deterrent effect from not trading and therefore an incentive to acquire information.


- Information acquisition in a limit order market




Heracles Polemarchakis (Brown University) gave a paper entitled “The Taxation of Trades in Assets”, joint with A. Citanna and M. Tirelli. The paper examines the effect on welfare of anonymous taxes on trades of assets in financial markets. The model is a two period one in which agents have different preferences as reflected in, for example, their discount rates.  Taxes introduce spreads between the bid and ask prices of assets.  The paper shows that even in a context in which taxes are anonymous then they can introduce Pareto improvements when markets are incomplete.


- Pareto improving taxation of assets



Sudipto Bhattacharya (Arizona State University and LSE) gave a paper joint with Sergei Guriev entitled “Knowledge Disclosure, Patents, and Optimal Organization of Research and Development”.  The paper looks at the role of patents and revenue sharing mechanisms for generating interim knowledge innovation.  The patent provides legal support for exclusive disclosure but involves leakage of knowledge.  An equity sharing arrangement reduces leakage but in giving away equity reduces the incentives on the development unit to invest.  The paper shows that the equity sharing arrangement is more likely to be chosen if interim knowledge is valuable and intellectual property rights are not well protected.  The paper also examines corporate venturing and argues that corporate venturing may strengthen a research unit’s incentive to generate knowledge when it is financially constrained.


-Knowledge disclosure patents, and optimal organization of research and development






In “Caught on Tape: Predicting Institutional Ownership with Order Flow”, Tarun Ramadorai (Saïd Business School), joint with John Campbell and Tuomo Vuolteenaho, uses data on share trading to infer changes in institutional ownership.  The paper examines the relation between reported quarterly changes in institutional ownership and trade data classified by the size of trades.  It finds that institutional ownership increases with buy volumes and decreases with total sell volume.  Institutions trade in very large or small volumes and individuals in intermediate volumes.  Larger volumes of large and small trade volume are associated with increases in institutional ownership.


- Caught On Tape: Predicting Institutional Ownership With Order Flow




Patrick Bolton (Princeton University) presented a paper entitled “Thinking Ahead, Part 1: The Decision Problem” joint with Antoine Faure-Grimaud in which the authors attempt to endogenize bounded rationality and contract incompleteness.  They argue that this results from reluctance on the part of agents to think ahead to what future actions should be taken.  They consider a model in which it takes time to think ahead and it therefore delays the time at which outcomes are realized. However, thinking ahead allows for more rapid reaction when events materialize.  They show that it is possible to determine where agents should concentrate their attention, how they should devote more thinking to large investments and why it is never optimal to stop thinking ahead on learning bad news.  This leads to a type of satisficing behaviour in which agents stop thinking ahead once a certain level performance has been attained.


- Thinking Ahead Part I: The Decision Problem





John Campbell (Harvard University) presented a paper entitled “Bad Beta, Good Beta” joint with Tuomo Vuolteenaho.  The underlying question is what is going on with value versus growth or glamour stocks.  High price:book ratios could reflect high returns on capital employed or low required returns.  Low returns could in turn reflect low risk or mispricings.  The paper attempts to disentangle these effects by decomposing betas into components that are associated with cash flow returns and discount rates.  The paper reports that growth stocks have high beta coefficients associated with discount rates.  Since betas associated with discount rates have lower price of risk, the beta of growth stocks is what the authors term “good” beta, namely increases in discount rates are associated with lower prices but also higher returns in the future.


- Bad beta, good beta

- Appendix: Additional Empirical Results and Robustness Checks




 John Geanokoplos (Yale University) examined the role of margin requirements in causing default and crashes in a paper entitled “Liquidity, Default and Crashes: Endogenous Contracts in General Equilibrium”.  He introduces default and collateral into a general equilibrium model in which the arrival of bad information about the value of an asset causes its price to fall by more than its intrinsic value.  The reason is that the relative wealth of buyers who own assets through leveraged margin positions declines disproportionately.  Furthermore, if the horizon over which the asset might default shortens then the margin requirement on the asset will increase, further exacerbating liquidity constraints on buyers.  The paper argues that margin requirements will therefore be set at inappropriate levels during crises and that there is a case for regulation of margin requirements to reduce the risks of crashes.


Liquidity, default and crashes: endogenous contracts in general equilibrium



Thierry Foucault (HEC) presented a paper entitled “Does Anonymity Matter in Electronic Limit Order Markets?” joint with Sophie Moinas and Erik Theissen.  There has been a proliferation of electronic trading systems on stock markets and this paper examines one characteristic of such markets, namely whether the identity of those traders posting limit orders is revealed.  The paper evaluates this in the context of a model in which limit orders are viewed as options and where the anticipated volatility of stocks therefore affects the spread on trades.  The authors argue that the spread should be informative about future volatility and they test this on the Paris Bourse, which switched from non-anonymous to anonymous trading in April 2001.  The authors find that liquidity improved on the market and that, as anticipated by the model, the spread on trades became less predictive of future volatility.


Does anonymity matter in electronic limit order markets?



Mitchell Petersen (Kellogg, Northwestern University) presented “Does the Source of Capital Affect Capital Structure?” joint with Michael Faulkender.  The paper examines supply side influences on firms’ capital structure.  It measures supply side effects from bond market access and in particular whether firms have a bond rating.  The paper reports univariate, multivariate and instrumental variable estimates for Compustat firms over the period 1986 to 2000.  It demonstrates that firms with bond ratings have significantly higher levels of leverage than those that do not.  Even after controlling for demand factors and instrumenting bond ratings for possible endogeneity, the paper finds that firms with bond ratings are significantly more leveraged.


Does the source of capital affect capital structure?



Han Ozsoylev (Saïd Business School) presented a paper entitled “Rational Expectations and Social Interaction in Financial Markets” in which he examines the role of social interactions in financial markets.  He argued that investors are influenced by information that they receive from other investors and from observing their trading behaviour.  He cited evidence that fund managers in the same city display more similar trading patterns than those in different cities.  He represented social interactions in a variety of different forms, including cycles and hierarchical trees, and demonstrated how equililibria that generalize those of rational expectations models can be characterized.  The paper also reveals that social interactions can impair information aggregation and possibly account for crashes and frenzies.


Knowing Thy Neighbor: Social Interaction and Rational Expectations in Financial Markets



Nir Vulkan (Saïd Business School) gave a paper joint with Zvika Neeman entitled “Market Versus Negotiations: The Predominance of Centralized Markets”.  This paper examines the effects of competition between two commonly employed exchange systems – decentralized bargaining and a centralized market.  Privately informed traders can choose which of the two systems they wish to trade through.  The authors show that, in every perfect equilibrium, all trade takes place in the centralized market and almost no trade takes place through direct negotiations.


Markets Versus Negotiations: The Predominance of Centralized Markets



Organizers: Colin Mayer, Peter Moores Professor of Management Studies, Said Business School, University of Oxford & Director, Oxford Centre for Financial Studies, Oren Sussman, University Lecturer in Management Studies, Said Business School, University of Oxford and William J. Wilhelm Jr, Professor of Management Studies, Said Business School, University of Oxford & Professor of Commerce, McIntire School of Commerce, University of Virginia