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Changing the Rules of the Game: A Market Microstructure Perspective on the Effects of Regulating Financial Markets
Stockholm University, Faculty of Social Sciences, Stockholm Business School.
2019 (English)Doctoral thesis, comprehensive summary (Other academic)
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.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University , 2019.
Keywords [en]
Market fragmentation, liquidity, resiliency, short selling ban, commonality in liquidity, financial contagion, call auction, market integrity, auction attractiveness, price efficiency
National Category
Economics and Business
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-166580ISBN: 978-91-7797-650-9 (print)ISBN: 978-91-7797-651-6 (electronic)OAI: oai:DiVA.org:su-166580DiVA, id: diva2:1293277
Public defence
2019-04-24, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

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.

Available from: 2019-04-01 Created: 2019-03-04 Last updated: 2019-03-20Bibliographically approved
List of papers
1. Effects of market fragmentation on resiliency
Open this publication in new window or tab >>Effects of market fragmentation on resiliency
(English)Manuscript (preprint) (Other academic)
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.

National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-166572 (URN)
Available from: 2019-03-04 Created: 2019-03-04 Last updated: 2019-03-04Bibliographically approved
2. Effects of short selling bans on resiliency and commonality in liquidity
Open this publication in new window or tab >>Effects of short selling bans on resiliency and commonality in liquidity
(English)Manuscript (preprint) (Other academic)
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.

National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-166574 (URN)
Available from: 2019-03-04 Created: 2019-03-04 Last updated: 2019-03-04Bibliographically approved
3. Closing Time: Effects of the closing mechanism and design on market quality
Open this publication in new window or tab >>Closing Time: Effects of the closing mechanism and design on market quality
(English)Manuscript (preprint) (Other academic)
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.

National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-166575 (URN)
Available from: 2019-03-04 Created: 2019-03-04 Last updated: 2019-03-04Bibliographically approved
4. Call Auction Volatility Extensions
Open this publication in new window or tab >>Call Auction Volatility Extensions
(English)Manuscript (preprint) (Other academic)
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.

National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-166576 (URN)
Available from: 2019-03-04 Created: 2019-03-04 Last updated: 2019-03-04Bibliographically approved

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