Finance - Research Publications
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ItemAre Speed Bumps Beneficial?( 2023)This paper reviews the theoretical and empirical literature on speed bumps and market quality. Speed bumps are deliberate delays in processing order messages on an exchange. The academic evidence shows that implementing a speed bump benefits the exchange instituting it. It enhances competition at the top of the order book and reduces quoted and effective spreads on the delayed venue
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ItemHumans in charge of trading robots: the first experiment(OXFORD UNIV PRESS, )Abstract We present results from an experiment where participants have access to automated trading algorithms, which they may deploy at will while still trading manually. Treatments differ in whether robots must not be halted, deployment is compulsory, or robots can be halted and replaced at will. We hypothesize that robot trading would reduce mispricing, and that the effect would be more pronounced as commitment degree increases. Yet, compared to manual trading only, we observe equally large and frequent mispricing and, in early trading, significantly higher bid–ask spreads and more frequent flash crashes/price surges. Participants earn more, provided they combine robot and manual trading. Compared to evidence from archival data, we find significantly higher use of liquidity-taking robots. We attribute this to the inability, in the field, to identify the presence of liquidity takers when they happen not to trade.
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ItemNo Preview AvailableResource allocation, computational complexity, and market design(ELSEVIER, 2024-06)
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ItemNo Preview AvailableFinancial Advisers’ and Key Informants’ Perspectives on the Australian Industry-Led Moratorium on Genetic Tests in Life Insurance(Karger Publishers, 2023)INTRODUCTION: Genetic discrimination (GD) in the context of life insurance is a perennial concern in Australia and internationally. To address such concerns in Australia, an industry self-regulated Moratorium on Genetic Tests in Life Insurance was introduced in 2019 to restrict life insurers from using genetic test results in underwriting for policies under certain limits. Financial advisers (FAs) are sometimes engaged by clients to provide financial advice and assist them to apply for life insurance. They are therefore well-placed to comment on GD and the operation of the Moratorium. Despite this, the financial advising sector in Australia has yet to be studied empirically with regards to GD and the Moratorium. This study aims to capture this perspective by reporting on interviews with the financial advising sector. METHODS: Ten semi-structured qualitative interviews were conducted with FAs and key informants and were analysed using thematic analysis. CONCLUSION(S): Participants' level of awareness and understanding of the Moratorium varied. Participants reported mixed views on the Moratorium's effectiveness, how it operates in practice, and perceived industry compliance. Participants also provided reflections on Australia's current approach to regulating GD, with most participants supporting the concept of industry self-regulation but identifying a need for this to be supplemented with external oversight and meaningful recourse mechanisms for consumers. Our results suggest that there is scope to increase FAs' awareness of GD, and that further research, consultation, and policy consideration are required to identify an optimal regulatory response to GD in Australia.
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ItemNo Preview AvailableEmotional Engagement and Trading Performance(INFORMS, 2020-04-27)Extensive research in neuroscience proves that rational decision-making depends on accurate anticipative emotions. We test this proposition in the context of financial markets. We replicate a multiperiod trading game that reliably generates bubbles, while tracking participants’ heart rate and skin conductance. We find that participants whose heart rate changes in anticipation of trading at inflated prices achieve higher earnings. In contrast, when such trades precede heart rate changes, earnings decrease. Higher (lower) earnings accrue to participants whose skin conductance responds to the market value of stock (cash) holdings. Our findings demonstrate that emotions are integral to sound financial decision-making.
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ItemNo Preview AvailableThe value of growth: Changes in profitability and future stock returns(Elsevier BV, 2024-01-01)
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ItemClosing Mechanisms in European Equities(The University of Melbourne, 2023-06-01)This paper examines end-of-day trading mechanisms in European equity markets. Over the period January 2021 to September 2022, closing mechanisms account for around 18% of consolidated Euro volume in STOXX 600 stocks. Only continuous lit trading accounts for a larger fraction of activity. The high share of activity at the close is attributed to a range of factors including increases in assets under management in index and quantitative investment strategies and in Exchange Traded Funds. Closing mechanisms exhibit notably higher market share on rebalance and month-end days. The market share of closing mechanisms increases to 40% and 30% on rebalance and month-end days, respectively. These increases are likely due to benchmarking practices of index and other institutional traders. The market share of closing mechanisms decreases significantly on volatile and less liquid days. Increased activity in closing auctions has focused attention on the typically higher cost of trading in primary exchange closing auctions. Alternative closing mechanisms have emerged to compete with primary exchange auctions. Despite the emergence of competing venues, primary exchange closing auctions continue to capture the lion’s share of closing volume, representing about 84% of all closing activity. Why have alternative closing mechanisms failed to attract significant trading volume despite offering cheaper services? And why have some alternative mechanisms been more successful than others? The answers to these questions lie in the differing perspectives of market participants about the potential impact of fragmentation at the close, the ability to capture the benefits of the lower fees, and differences in the market structure of the mechanisms.
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ItemNo Preview AvailableDissecting the listing gap: Mergers, private equity, or regulation?(Elsevier BV, 2023-05)The abnormal decline in the number of U.S. public firms is often blamed on merger activity, private equity investments, and stock market regulations. We compare the effects of these channels in a unified framework. In the U.S., an extra 100 mergers is associated with 22.01 additional missing public firms, whereas an extra 100 PE deals is associated with 3.62 fewer missing public firms. Regulatory changes contribute to the decline of U.S. listings too. We also specify the types of deals that most strongly affect listings. Finally, we document that similar listing gaps emerge in other developed economies.
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ItemThe effect of action contingency on social perception is independent of person-like appearance and is related to deactivation of the frontal component of the self-agency network.(Springer Science and Business Media LLC, 2022-10-15)The detection of object movement that is contingent on one's own actions (i.e., movements with action contingency) influences social perception of the object; such interactive objects tend to create a good impression. However, it remains unclear whether neural representation of action contingency is associated with subsequent socio-cognitive evaluation of "contacting agents", or whether the appearance of agents (e.g., face- or non-face-like avatars) is essential for this effect. In this study, we conducted a functional magnetic resonance imaging (fMRI) task with two phases: contact (contact with face- or non-face-like avatars moving contingently or non-contingently) and recognition (rating a static image of each avatar). Deactivation of the frontoparietal self-agency network and activation of the reward network were the main effects of action contingency during the contact phase, consistent with previous findings. During the recognition phase, static avatars that had previously moved in a contingent manner deactivated the frontal component of the frontoparietal network (bilateral insula and inferior-middle frontal gyri), regardless of person-like appearance. Our results imply that frontal deactivation may underlie the effect of action contingency on subsequent social perception, independent of person-like appearance.
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ItemRetail Trading in European Equity Markets(University of Melbourne, Faculty of Business and Economics, 2023)Recent growth in retail trading in global equity markets has drawn considerable attention to the execution of retail flows. European market operators offer diverse retail trading mechanisms: both retail-specific mechanisms and all-to-all trading mechanisms that allow the interaction of all trader types. Retail-specific trading mechanisms are categorized into Single Market Maker and Competing Market Maker mechanisms. Markets also differ on other dimensions such as the way market makers compete, the number of reference markets, order flow segmentation, explicit costs, and Payment for Order Flow (PFOF). Using the findings from the existing literature this paper argues in favor of competition between market makers, the use of a consolidated market view as the reference price and less segmentation. It also raises questions about potential conflicts arising from low or zero explicit costs and PFOF. The paper also recommends that policy makers can improve retail execution quality by requiring additional transparency around retail trades and implementing a consolidated tape.