Essays on Market Microstructure: Price Discovery and Informed Trading

Market microstructure is “the study of the trading mechanisms used for financial securities” (Hasbrouck (2007)). It seeks to understand the sources of value and reasons for trade, in a setting with different types of traders, and different private and public information sets. The actual mechanisms of trade are a continually changing object of study. These include continuous markets, auctions, limit order books, dealer markets, or combinations of these operating as a hybrid market. Microstructure also has to allow for the possibility of multiple prices. At any given time an investor may be faced with a multitude of different prices, depending on whether he or she is buying or selling, the quantity he or she wishes to trade, and the required speed for the trade. The price may also depend on the relationship that the trader has with potential counterparties. In this research, I touch upon all of the above issues. I do this by studying three specific areas, all of which have both practical and policy implications. First, I study the role of information in trading and pricing securities in markets with a heterogeneous population of traders, some of whom are informed and some not, and who trade for different private or public reasons. Second, I study the price discovery of stocks in a setting where they are simultaneously traded in more than one market. Third, I make a contribution to the ongoing discussion about market design, i.e. the question of which trading systems and ways of organizing trading are most efficient. A common characteristic throughout my thesis is the use of high frequency datasets, i.e. tick data. These datasets include all trades and quotes in a given security, rather than just the daily closing prices, as in traditional asset pricing literature. This thesis consists of four separate essays. In the first essay I study price discovery for European companies cross-listed in the United States. I also study explanatory variables for differences in price discovery. In my second essay I contribute to earlier research on two issues of broad interest in market microstructure: market transparency and informed trading. I examine the effects of a change to an anonymous market at the OMX Helsinki Stock Exchange. I broaden my focus slightly in the third essay, to include releases of macroeconomic data in the United States. I analyze the effect of these releases on European cross-listed stocks. The fourth and last essay examines the uses of standard methodologies of price discovery analysis in a novel way. Specifically, I study price discovery within one market, between local and foreign traders.

A capability-based view of organisational renewal : Combining opportunity- and advantage-seeking growth in large, established European and North American wood-industry companies

The purpose of this study was to extend understanding of how large firms pursuing sustained and profitable growth manage organisational renewal. A multiple-case study was conducted in 27 North American and European wood-industry companies, of which 11 were chosen for closer study. The study combined the organisational-capabilities approach to strategic management with corporate-entrepreneurship thinking. It charted the further development of an identification and classification system for capabilities comprising three dimensions: (i) the dynamism between firm-specific and industry-significant capabilities, (ii) hierarchies of capabilities and capability portfolios, and (iii) their internal structure. Capability building was analysed in the context of the organisational design, the technological systems and the type of resource-bundling process (creating new vs. entrenching existing capabilities). The thesis describes the current capability portfolios and the organisational changes in the case companies. It also clarifies the mechanisms through which companies can influence the balance between knowledge search and the efficiency of knowledge transfer and integration in their daily business activities, and consequently the diversity of their capability portfolio and the breadth and novelty of their product/service range. The largest wood-industry companies of today must develop a seemingly dual strategic focus: they have to combine leading-edge, innovative solutions with cost-efficient, large-scale production. The use of modern technology in production was no longer a primary source of competitiveness in the case companies, but rather belonged to the portfolio of basic capabilities. Knowledge and information management had become an industry imperative, on a par with cost effectiveness. Yet, during the period of this research, the case companies were better in supporting growth in volume of the existing activity than growth through new economic activities. Customer-driven, incremental innovation was preferred over firm-driven innovation through experimentation. The three main constraints on organisational renewal were the lack of slack resources, the aim for lean, centralised designs, and the inward-bound communication climate.

The Impact of Emissions Trading on the Price of Electricity in Nord Pool : Market Power and Price Determination in the Nordic Electricity Market

The objective of this thesis is to find out how dominant firms in a liberalised electricity market will react when they face an increase in the level of costs due to emissions trading, and how this will effect the price of electricity. The Nordic electricity market is chosen as the setting in which to examine the question, since recent studies on the subject suggest that interaction between electricity markets and emissions trading is very much dependent on conditions specific to each market area. There is reason to believe that imperfect competition prevails in the Nordic market, thus the issue is approached through the theory of oligopolistic competition. The generation capacity available at the market, marginal cost of electricity production and seasonal levels of demand form the data based on which the dominant firms are modelled using the Cournot model of competition. The calculations are made for two levels of demand, high and low, and with several values of demand elasticity. The producers are first modelled under no carbon costs and then by adding the cost of carbon dioxide at 20€/t to those technologies subject to carbon regulation. In all cases the situation under perfect competition is determined as a comparison point for the results of the Cournot game. The results imply that the potential for market power does exist on the Nordic market, but the possibility for exercising market power depends on the demand level. In season of high demand the dominant firms may raise the price significantly above competitive levels, and the situation is aggravated when the cost of carbon dioixide is accounted for. Under low demand leves there is no difference between perfect and imperfect competition. The results are highly dependent on the price elasticity of demand.

Cryptographic Software Export Controls in the EU

Certain software products employing digital techniques for encryption of data are subject to export controls in the EU Member States pursuant to Community law and relevant laws in the Member States. These controls are agreed globally in the framework of the so-called Wassenaar Arrangement. Wassenaar is an informal non-proliferation regime aimed at promoting international stability and responsibility in transfers of strategic (dual-use) products and technology. This thesis covers provisions of Wassenaar, Community export control laws and export control laws of Finland, Sweden, Germany, France and United Kingdom. This thesis consists of five chapters. The first chapter discusses the ratio of export control laws and the impact they have on global trade. The ratio is originally defence-related - in general to prevent potential adversaries of participating States from having the same tools, and in particular in the case of cryptographic software to enable signals intelligence efforts. Increasingly as the use of cryptography in a civilian context has mushroomed, export restrictions can have negative effects on civilian trade. Information security solutions may also be took weak because of export restrictions on cryptography. The second chapter covers the OECD's Cryptography Policy, which had a significant effect on its member nations' national cryptography policies and legislation. The OECD is a significant organization,because it acts as a meeting forum for most important industrialized nations. The third chapter covers the Wassenaar Arrangement. The Arrangement is covered from the viewpoint of international law and politics. The Wassenaar control list provisions affecting cryptographic software transfers are also covered in detail. Control lists in the EU and in Member States are usually directly copied from Wassenaar control lists. Controls agreed in its framework set only a minimum level for participating States. However, Wassenaar countries can adopt stricter controls. The fourth chapter covers Community export control law. Export controls are viewed in Community law as falling within the domain of Common Commercial Policy pursuant to Article 133 of the EC Treaty. Therefore the Community has exclusive competence in export matters, save where a national measure is authorized by the Community or falls under foreign or security policy derogations established in Community law. The Member States still have a considerable amount of power in the domain of Common Foreign and Security Policy. They are able to maintain national export controls because export control laws are not fully harmonized. This can also have possible detrimental effects on the functioning of internal market and common export policies. In 1995 the EU adopted Dual-Use Regulation 3381/94/EC, which sets common rules for exports in Member States. Provisions of this regulation receive detailed coverage in this chapter. The fifth chapter covers national legislation and export authorization practices in five different Member States - in Finland, Sweden, Germany, France and in United Kingdom. Export control laws of those Member States are covered when the national laws differ from the uniform approach of the Community's acquis communautaire. Keywords: export control, encryption, software, dual-use, license, foreign trade, e-commerce, Internet

Export of organic matter, sulphate and base cations from boreal headwater catchments downstream to the coast: impacts of land use and climate

The terrestrial export of dissolved organic matter (DOM) is associated with climate, vegetation and land use, and thus is under the influence of climatic variability and human interference with terrestrial ecosystems, their soils and hydrological cycles. The present study provides an assessment of spatial variation of DOM concentrations and export, and interactions between DOM, catchment characteristics, land use and climatic factors in boreal catchments. The influence of catchment characteristics, land use and climatic drivers on the concentrations and export of total organic carbon (TOC), total organic nitrogen (TON) and dissolved organic phosphorus (DOP) was estimated using stream water quality, forest inventory and climatic data from 42 Finnish pristine forested headwater catchments, and water quality monitoring, GIS land use, forest inventory and climatic data from the 36 main Finnish rivers (and their sub-catchments) flowing to the Baltic Sea. Moreover, the export of DOM in relation to land use along a European climatic gradient was studied using river water quality and land use data from four European areas. Additionally, the role of organic and minerogenic acidity in controlling pH levels in Finnish rivers and pristine streams was studied by measuring organic anion, sulphate (SO4) and base cation (Ca, Mg, K and Na) concentrations. In all study catchments, TOC was a major fraction of DOM, with much lower proportions of TON and DOP. Moreover, most of TOC and TON was in a dissolved form. The correlation between TOC and TON concentrations was strong and TOC concentrations explained 78% of the variation in TON concentrations in pristine headwater streams. In a subgroup of 20 headwater catchments with similar climatic conditions and low N deposition in eastern Finland, the proportion of peatlands in the catchment and the proportion of Norway spruce (Picea abies Karsten) of the tree stand had the strongest correlation with the TOC and TON concentrations and export. In Finnish river basins, TOC export increased with the increasing proportion of peatland in the catchment, whereas TON export increased with increasing extent of agricultural land. The highest DOP concentrations and export were recorded in river basins with a high extent of agricultural land and urban areas, reflecting the influence of human impact on DOP loads. However, the most important predictor for TOC, TON and DOP export in Finnish rivers was the proportion of upstream lakes in the catchment. The higher the upstream lake percentage, the lower the export indicating organic matter retention in lakes. Molar TOC:TON ratio decreased from headwater catchments covered by forests and peatlands to the large river basins with mixed land use, emphasising the effect of the land use gradient on the stoichiometry of rivers. This study also demonstrated that the land use of the catchments is related to both organic and minerogenic acidity in rivers and pristine headwater streams. Organic anion dominated in rivers and streams situated in northern Finland, reflecting the higher extent of peatlands in these areas, whereas SO4 dominated in southern Finland and on western coastal areas, where the extent of fertile areas, agricultural land, urban areas, acid sulphate soils, and sulphate deposition is highest. High TOC concentrations decreased pH values in the stream and river water, whereas no correlation between SO4 concentrations and pH was observed. This underlines the importance of organic acids in controlling pH levels in Finnish pristine headwater streams and main rivers. High SO4 concentrations were associated with high base cation concentrations and fertile areas, which buffered the effects of SO4 on pH.

From trading to eCommunity management

"The increasing pressure for enterprises to join into agile business networks is changing the requirements on the enterprise computing systems. The supporting infrastructure is increasingly required to provide common facilities and societal infrastructure services to support the lifecycle of loosely-coupled, eContract-governed business networks. The required facilities include selection of those autonomously administered business services that the enterprises are prepared to provide and use, contract negotiations, and furthermore, monitoring of the contracted behaviour with potential for breach management. The essential change is in the requirement of a clear mapping between business-level concepts and the automation support for them. Our work has focused on developing B2B middleware to address the above challenges; however, the architecture is not feasible without management facilities for trust-aware decisions for entering business networks and interacting within them. This paper discusses how trust-based decisions are supported and positioned in the B2B middleware."

Finnish Short-Term Stock Returns

Functioning capital markets are a crucial part of a competitive economy since they provide the mechanisms to allocate resources. In order to be well functioning a capital market has to be efficient. Market efficiency is defined as a market where prices at any time fully reflect all available information. Basically, this means that abnormal returns cannot be predicted since they are dependent on future, presently unknown, information. The debate of market efficiency has been going on for several decades. Most academics today would probably agree that financial markets are reasonably efficient since virtually nobody has been able to achieve continuous abnormal positive returns. However, it is clear that a set of return anomalies exists, although they are apparently to small to enable substantial economic profit. Moreover, these anomalies can often be attributed to market design. The motivation for this work is to expand the knowledge of short-term trading patterns and to offer some explanations for these patterns. In the first essay the return pattern during the day is examined. On average stock prices move during two time periods of the day, namely, immediately after the opening and around the formal close of the market. Since stock prices, on average, move upwards these abnormal returns are generally positive and cause the distinct U-shape of intraday returns. In the second essay the results in the first essay are examined further. The return pattern around the former close is shown to partly be the result of manipulative action by market participants. In the third essay the focus is shifted towards trading patterns of the underlying stocks on days when index options and index futures on the stocks expire. Generally no expiration day effect was found. However, some indication of an expiration day effect was found when a large amount of open in- or at-the-money contracts existed. Also, the effects were likelier to be found for shares with high index-weight but fairly low trading volume. Last, in the forth essay the attention is turned to the behaviour of different tax clienteles around the dividend ex-day. Two groups of investors showed abnormal trading behaviour. Domestic non-financial investors, especially domestic companies, showed a dividend capturing behaviour, i.e. buying cum-dividend and selling ex-dividend shares. The opposite behaviour was found for foreign investors and domestic financial institutions. The effect was more notable for high yield, high volume stocks.

Modeling and Forecasting Implied Volatility: Implications for Trading, Pricing, and Risk Management

Modeling and forecasting of implied volatility (IV) is important to both practitioners and academics, especially in trading, pricing, hedging, and risk management activities, all of which require an accurate volatility. However, it has become challenging since the 1987 stock market crash, as implied volatilities (IVs) recovered from stock index options present two patterns: volatility smirk(skew) and volatility term-structure, if the two are examined at the same time, presents a rich implied volatility surface (IVS). This implies that the assumptions behind the Black-Scholes (1973) model do not hold empirically, as asset prices are mostly influenced by many underlying risk factors. This thesis, consists of four essays, is modeling and forecasting implied volatility in the presence of options markets’ empirical regularities. The first essay is modeling the dynamics IVS, it extends the Dumas, Fleming and Whaley (DFW) (1998) framework; for instance, using moneyness in the implied forward price and OTM put-call options on the FTSE100 index, a nonlinear optimization is used to estimate different models and thereby produce rich, smooth IVSs. Here, the constant-volatility model fails to explain the variations in the rich IVS. Next, it is found that three factors can explain about 69-88% of the variance in the IVS. Of this, on average, 56% is explained by the level factor, 15% by the term-structure factor, and the additional 7% by the jump-fear factor. The second essay proposes a quantile regression model for modeling contemporaneous asymmetric return-volatility relationship, which is the generalization of Hibbert et al. (2008) model. The results show strong negative asymmetric return-volatility relationship at various quantiles of IV distributions, it is monotonically increasing when moving from the median quantile to the uppermost quantile (i.e., 95%); therefore, OLS underestimates this relationship at upper quantiles. Additionally, the asymmetric relationship is more pronounced with the smirk (skew) adjusted volatility index measure in comparison to the old volatility index measure. Nonetheless, the volatility indices are ranked in terms of asymmetric volatility as follows: VIX, VSTOXX, VDAX, and VXN. The third essay examines the information content of the new-VDAX volatility index to forecast daily Value-at-Risk (VaR) estimates and compares its VaR forecasts with the forecasts of the Filtered Historical Simulation and RiskMetrics. All daily VaR models are then backtested from 1992-2009 using unconditional, independence, conditional coverage, and quadratic-score tests. It is found that the VDAX subsumes almost all information required for the volatility of daily VaR forecasts for a portfolio of the DAX30 index; implied-VaR models outperform all other VaR models. The fourth essay models the risk factors driving the swaption IVs. It is found that three factors can explain 94-97% of the variation in each of the EUR, USD, and GBP swaption IVs. There are significant linkages across factors, and bi-directional causality is at work between the factors implied by EUR and USD swaption IVs. Furthermore, the factors implied by EUR and USD IVs respond to each others’ shocks; however, surprisingly, GBP does not affect them. Second, the string market model calibration results show it can efficiently reproduce (or forecast) the volatility surface for each of the swaptions markets.

Political Risk in Credit Evaluation: Empirical Studies and Survey Results

Financing trade between economic agents located in different countries is affected by many types of risks, resulting from incomplete information about the debtor, the problems of enforcing international contracts, or the prevalence of political and financial crises. Trade is important for economic development and the availability of trade finance is essential, especially for developing countries. Relatively few studies treat the topic of political risk, particularly in the context of international lending. This thesis explores new ground to identify links between political risk and international debt defaults. The core hypothesis of the study is that the default probability of debt increases with increasing political risk in the country of the borrower. The thesis consists of three essays that support the hypothesis from different angles of the credit evaluation process. The first essay takes the point of view of an international lender assessing the credit risk of a public borrower. The second investigates creditworthiness assessment of companies. The obtained results are substantiated in the third essay that deals with an extensive political risk survey among finance professionals in developing countries. The financial instruments of core interest are export credit guaranteed debt initiated between the Export Credit Agency of Finland and buyers in 145 countries between 1975 and 2006. Default events of the foreign credit counterparts are conditioned on country-specific macroeconomic variables, corporate-specific accounting information as well as political risk indicators from various international sources. Essay 1 examines debt issued to government controlled institutions and conditions public default events on traditional macroeconomic fundamentals, in addition to selected political and institutional risk factors. Confirming previous research, the study finds country indebtedness and the GDP growth rate to be significant indicators of public default. Further, it is shown that public defaults respond to various political risk factors. However, the impact of the risk varies between countries at different stages of economic development. Essay 2 proceeds by investigating political risk factors as conveivable drivers of corporate default and uses traditional accounting variables together with new political risk indicators in the credit evaluation of private debtors. The study finds links between corporate default and leverage, as well as between corporate default and the general investment climate and measeures of conflict in the debtor country. Essay 3 concludes the thesis by offering survey evidence on the impact of political risk on debt default, as perceived and experienced by 103 finance professionals in 38 developing countries. Taken together, the results of the thesis suggest that various forms of political risk are associated with international debt defaults and continue to pose great concerns for both international creditors and borrowers in developing countries. The study provides new insights on the importance of variable selection in country risk analysis, and shows how political risk is actually perceived and experienced in the riskier, often lower income countries of the global economy.

The Relationship Between Liquidity, Trading Activity and Return - Studies of the Finnish and Swedish Stock Markets

Liquidity, or how easy an investment is to buy or sell, is becoming increasingly important for financial market participants. The objective of this dissertation is to contribute to the understanding of how liquidity affects financial markets. The first essays analyze the actions taken by underwriters immediately after listing to improve liquidity of IPO stock. To estimate the impact of underwriter activity on the pricing of the IPOs, the order book during the first weeks of trading in the IPO stock is studied. Evidence of stabilization and liquidity enhancing activities by underwriters is found. The second half of the dissertation is concerned with the daily trading of stocks where liquidity may be impacted by policy issues such as changes in taxes or exchange fees and by opening the access to the markets for foreign investors. The desirability of a transaction tax on securities trading is addressed. An increase in transaction tax is found to cause lower prices and higher volatility. In the last essay the objective is to determine if the liquidity of a security has an impact on the return investors require. The results support the notion that returns are negatively correlated to liquidity.

The Impact of Cultural Factors on Post-Acquisition Integration: Domestic and Foreign Acquisitions of Finnish Companies in 1993-2004

Acquisitions are a central component of corporate strategy. They contribute to competitive advantage by offering possibilities for both cost reductions and for revenue enhancements. However, many acquisition benefits cannot be realized without a successful integration of the acquiring and the acquired firms. Previous research shows that national and organizational culture can play a major role in determining the integration outcomes. Therefore, the overall aim of the thesis is to map out and illustrate the impact mechanisms of cultural factors in post-acquisition integration in order to explain the cultural aspects of acquisitions. This study has three main contributions. First, the study shows that international and domestic acquisitions differ concerning both strategic and cultural fit. Second, the findings highlight the importance of acculturation and cultural integration in determining post-acquisition outcomes. Finally, the study uncovers several impact mechanisms that shed light to the contradictory results related to cultural differences in previous research.

An Empirical Investigation of Value-at-Risk in Long and Short Trading Positions

This paper uses the Value-at-Risk approach to define the risk in both long and short trading positions. The investigation is done on some major market indices(Japanese, UK, German and US). The performance of models that takes into account skewness and fat-tails are compared to symmetric models in relation to both the specific model for estimating the variance, and the distribution of the variance estimate used as input in the VaR estimation. The results indicate that more flexible models not necessarily perform better in predicting the VaR forecast; the reason for this is most probably the complexity of these models. A general result is that different methods for estimating the variance are needed for different confidence levels of the VaR, and for the different indices. Also, different models are to be used for the left respectively the right tail of the distribution.

The Value of Being on the Net- the effects of Web sites of companies on consumer decision making

The unique characteristics of marketspace in combination with the fast growing number of consumers interested in e-commerce have created new research areas of interest to both marketing and consumer behaviour researchers. Consumer behaviour researchers interested in the decision making processes of consumers have two new sets of questions to answer. The first set of questions is related to how useful theories developed for a marketplace are in a marketspace context. Cyber auctions, Internet communities and the possibilities for consumers to establish dialogues not only with companies but also with other consumers make marketspace unique. The effects of these distinctive characteristics on the behaviour of consumers have not been systematically analysed and therefore constitute the second set of questions which have to be studied. Most companies feel that they have to be online even though the effects of being on the Net are not unambiguously positive. The relevance of the relationship marketing paradigm in a marketspace context have to be studied. The relationship enhancement effects of websites from the customers’ point of view are therefore emphasized in this research paper. Representatives of the Net-generation were analysed and the results show that companies should develop marketspace strategies while Net presence has a value-added effect on consumers. The results indicate that the decision making processes of the consumers are also changing as a result of the progress of marketspace