Colla, Paolo
(2005)
Essays on non-fundamental speculation, trading behaviour and strategic information sharing.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis is mainly divided into three chapters. Even though the three chapters have different aims, they all concern investment environment and process. With respect to the former aspect, we consider how stocks and bonds are traded in securities markets. The second and third chapter deal with markets where a single risky asset is sequentially traded in batch auctions. In the fourth chapter we consider bond markets where transaction costs create frictions. As for the investment process, we study how market participants should choose their investment, and when should it be made. We analyze trading strategies for market participants in the second and third chapter, while active bond portfolio management is dynamically characterized in the fourth chapter. Chapter 2 develops a dynamic trading game in which fundamental insiders coexist with non-fundamental speculators. We study inclusions in the S&P 500 as an example in which non-fundamental speculation arises due to preannouncing index replacements. Evidence on volume and liquidity is consistent with our theoretical analysis. Chapter 3 deals with asymmetrically informed traders engaging in information sharing about the asset's fundamental value. In the presence of information sharing, trading activity and price volatility both cluster at the end of the trading period, and price informativeness is reduced. Our model predicts a rich variety of patterns for liquidity, volume and return volatility. Chapter 4 focuses on affine term structure models as portfolio management tools. We use returns implied by different models as inputs for an investor's portfolio optimization problem. Each period we determine the optimal investment, and then characterize the financial properties of trading strategies. We show that evaluating term structure models from a financial perspective may yield conflicting results with those arising from a statistical metric.
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