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
-
SLIDES
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
-
SLIDES
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
-
SLIDES
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
-
SLIDES
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
-
POWER POINT SLIDES
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
