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Changing the Rules of the Game: A Market Microstructure Perspective on the Effects of Regulating Financial Markets
Stockholms universitet, Samhällsvetenskapliga fakulteten, Företagsekonomiska institutionen.
2019 (Engelska)Doktorsavhandling, sammanläggning (Övrigt vetenskapligt)
Abstract [en]

This dissertation contains four articles that examine the effects brought about by the implementation of new regulations and changes in the trading landscape on different facets of market quality and integrity.

Article I studies how the fragmentation of equity markets affects the speed of recovery of the market, both under normal market conditions and in times of stress. The results show that fragmentation increases the average ability of the market to converge towards its long-run liquidity levels by shortening the duration of liquidity deviations. In times of stress, fragmentation also speeds up the replenishment of the limit order book and its ability to recover from the moments of stress.

Article II examines the impact of introducing short selling restrictions on the speed of recovery of the market and commonality in liquidity. The findings indicate that short selling bans contribute to lowering the risk of financial contagion by decreasing the commonality in liquidity levels of banned securities. However, the restrictions also significantly hamper the ability of banned stocks to recover from transitory liquidity deviations.

Article III exploits the change in closing mechanism of 43 exchanges around the world to analyse the effects of batch facilities on liquidity, price efficiency, and market integrity. The results support the idea that batch facilities improve market quality, that auction design is important in explaining auction performance, and that the effects depend on the level of development of the market and the liquidity of the stock.

Article IV investigates whether volatility extensions in closing auctions improve the efficiency of closing prices. The findings confirm that the introduction of a volatility extension enhances price efficiency by reducing transitory closing price volatility. The results also suggest that the improvement in price efficiency is due to enhanced market integrity and to greater investor trust in the auction mechanism.

Ort, förlag, år, upplaga, sidor
Stockholm: Stockholm Business School, Stockholm University , 2019.
Nyckelord [en]
Market fragmentation, liquidity, resiliency, short selling ban, commonality in liquidity, financial contagion, call auction, market integrity, auction attractiveness, price efficiency
Nationell ämneskategori
Ekonomi och näringsliv
Forskningsämne
företagsekonomi
Identifikatorer
URN: urn:nbn:se:su:diva-166580ISBN: 978-91-7797-650-9 (tryckt)ISBN: 978-91-7797-651-6 (digital)OAI: oai:DiVA.org:su-166580DiVA, id: diva2:1293277
Disputation
2019-04-24, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (Engelska)
Opponent
Handledare
Anmärkning

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 3: Manuscript. Paper 4: Manuscript.

Tillgänglig från: 2019-04-01 Skapad: 2019-03-04 Senast uppdaterad: 2020-05-18Bibliografiskt granskad
Delarbeten
1. Effects of market fragmentation on resiliency
Öppna denna publikation i ny flik eller fönster >>Effects of market fragmentation on resiliency
(Engelska)Manuskript (preprint) (Övrigt vetenskapligt)
Abstract [en]

This study analyses the impact of market fragmentation on resiliency, defined as the speed of recovery of the market, in normal conditions and in times of stress. I find that fragmentation has an overall positive effect on resiliency. Fragmentation increases the average ability of the market to converge towards its long-run liquidity levels by shortening the duration of liquidity deviations. In times of stress, fragmentation also speeds up the replenishment of the limit order book and its ability to recover from the moments of stress. Following the Flash Crash of 2010 and recent episodes of liquidity dry-ups, fragmentation has become a source of concern. Given the rising tendency of markets to fragment, understanding the impact of fragmentation on resiliency is important for regulators and market participants.

Nationell ämneskategori
Företagsekonomi
Forskningsämne
företagsekonomi
Identifikatorer
urn:nbn:se:su:diva-166572 (URN)
Tillgänglig från: 2019-03-04 Skapad: 2019-03-04 Senast uppdaterad: 2019-03-04Bibliografiskt granskad
2. Effects of short selling bans on resiliency and commonality in liquidity
Öppna denna publikation i ny flik eller fönster >>Effects of short selling bans on resiliency and commonality in liquidity
(Engelska)Manuskript (preprint) (Övrigt vetenskapligt)
Abstract [en]

Using a unique implementation of a short selling ban on the financial stocks of Belgium, France, and Italy, I find that short selling restrictions have contrasting effects on resiliency and commonality in liquidity. Short selling bans contribute to lowering the risk of financial contagion by decreasing the commonality in liquidity levels of banned stocks. However, the restrictions also cause a significant deterioration in resiliency, hindering the ability of banned stocks to recover from transitory liquidity deviations. Regulators around the world have reacted to episodes of financial instability by banning short selling. However, its detrimental side effects cast doubts on the effectiveness of such regulation.

Nationell ämneskategori
Företagsekonomi
Forskningsämne
företagsekonomi
Identifikatorer
urn:nbn:se:su:diva-166574 (URN)
Tillgänglig från: 2019-03-04 Skapad: 2019-03-04 Senast uppdaterad: 2019-03-04Bibliografiskt granskad
3. Closing Time: Effects of the closing mechanism and design on market quality
Öppna denna publikation i ny flik eller fönster >>Closing Time: Effects of the closing mechanism and design on market quality
(Engelska)Manuskript (preprint) (Övrigt vetenskapligt)
Abstract [en]

We study the effects that closing batch facilities have on liquidity, price efficiency, and market integrity by exploiting the change in closing mechanism of 43 exchanges around the world. The main analysis supports the idea that the use of batch facilities improves market quality. However, we find evidence of the importance of auction design in explaining the performance of the auction. Closing auctions tend to be more beneficial if they integrate a randomised closing time and price stabilisation systems. Transparency and flexibility are generally detrimental. The results also show that the level of development of the market and the liquidity of the stock are relevant in determining the effects of batch facilities. Our findings have implications for regulators and exchanges seeking to improve the efficiency and integrity of their capital markets.

Nationell ämneskategori
Företagsekonomi
Forskningsämne
företagsekonomi
Identifikatorer
urn:nbn:se:su:diva-166575 (URN)
Tillgänglig från: 2019-03-04 Skapad: 2019-03-04 Senast uppdaterad: 2019-03-04Bibliografiskt granskad
4. Call Auction Volatility Extensions
Öppna denna publikation i ny flik eller fönster >>Call Auction Volatility Extensions
(Engelska)Manuskript (preprint) (Övrigt vetenskapligt)
Abstract [en]

Volatility extensions in closing auctions are designed to improve the efficiency of the closing price. We hypothesize that the channel for the efficiency increase is that extensions improve market integrity and investor trust in the auction mechanism. We confirm that the introduction of a volatility extension indeed reduces transitory closing price volatility, deters market manipulation strategies, and makes the auction more attractive to investors. Call auction volatility extensions are applied at several equity exchanges around the world, including Nasdaq, NYSE, and London Stock Exchange. This paper provides the first analysis of the effects of such mechanisms.

Nationell ämneskategori
Företagsekonomi
Forskningsämne
företagsekonomi
Identifikatorer
urn:nbn:se:su:diva-166576 (URN)
Tillgänglig från: 2019-03-04 Skapad: 2019-03-04 Senast uppdaterad: 2020-01-23Bibliografiskt granskad

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